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California Enacts Another Risk Factor

On September 18, Governor Gavin Newsom signed AB 5, a bill dealing with the classification of workers as employees or independent contractors.  It will probably come as no surprise that the bill intended to make it more likely that a worker will be classified as an employee.  It effected this change by codifying the California Supreme Court's endorsement of the so-called ABC test adopted in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018).  The Supreme Court's decision was limited to the context of California wage orders.  These impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees.  Because AB 5 the application of the ABC test beyond the wage order context, it is expected to have an enormous impact on California businesses.

As a securities lawyer, I have been watching for disclosures concerning the enactment of AB in SEC filings.  Below is a risk factor that appeared in an amendment to a registration statement filed shortly before Governor Newsom signed AB 5 into law:

"If our providers are characterized as employees, we would be subject to employment and withholding liabilities.

We structure our relationships with the Providers in a manner that we believe results in an independent contractor relationship, not an employee relationship. An independent contractor is generally distinguished from an employee by his or her degree of autonomy and independence in providing services. A high degree of autonomy and independence is generally indicative of a contractor relationship, while a high degree of control is generally indicative of an employment relationship. Although we believe that the Providers are properly characterized as independent contractors, tax or other regulatory authorities may in the future challenge our characterization of these relationships. We are aware of a number of judicial decisions and legislative proposals that could bring about major reforms in worker classification, including the California legislature's recent passage of California Assembly Bill 5, which California Governor Gavin Newsom has indicated he will sign into law this year ("AB 5"). AB 5 purports to codify the holding of the California Supreme Court's unanimous decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which introduced a new test for determining worker classification that is widely viewed as expanding the scope of employee relationships and narrowing the scope of independent contractor relationships. While AB 5 exempts certain licensed health care professionals, including physicians and psychologists, not all of our independent contractors work in exempt occupations. Given AB 5's recent passage, there is no guidance from the regulatory authorities charged with its enforcement and there is a significant degree of uncertainty regarding its application. In addition, AB 5 has been the subject of widespread national discussion and it is possible that other jurisdictions may enact similar laws. As a result, there is significant uncertainty regarding what the worker classification regulatory landscape will look like in future years. While it is uncertain what direction federal and state government action may take in the future, the current economic climate indicates that the debate over worker classification will continue for the foreseeable future. If such regulatory authorities or state, federal or foreign courts were to determine that our providers are employees, and not independent contractors, we would be required to withhold income taxes, to withhold and pay Social Security, Medicare and similar taxes and to pay unemployment and other related payroll taxes. We would also be liable for unpaid past taxes and subject to penalties. As a result, any determination that the Providers are our employees could have a material adverse effect on our business, financial condition and results of operations."

 

 
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