California healthcare practices, including group practices and outpatient surgery centers, should brace for sweeping changes beginning on January 1, 2020, to the way they engage providers and staff, including nurses, physicians’ assistants, nurse practitioners, and technicians. At its core, Assembly Bill 5 puts a much greater burden on businesses to establish a worker is an independent contractor as opposed to an employee. According to the Los Angeles Times, “California’s bill is arguably the strongest of its kind in the nation, giving the state and cities the right to file suit against companies over misclassification, overriding the arbitration agreements that many businesses use to shield themselves from worker complaints.” The Times is not wrong. As more specifically set forth below, the new law imposes a three-part test in determining whether a worker can be categorized as an independent contractor. With respect to the present use of independent contractors in the healthcare industry, one aspect of the test is almost impossible to satisfy.
California Governor Gavin Newsom signed Assembly Bill 5 on September 18, 2019, which will take effect on January 1, 2020. According to Newsom, the new law “will help reduce worker misclassification — workers being wrongly classified as ‘independent contractors’ rather than employees, which erodes basic worker protections like the minimum wage, paid sick days and health insurance benefits…” However, as we will likely discover in the coming years, the proverbial road to hell is indeed paved with good intentions.
The new law was born from a California Supreme Court ruling in the case of Dynamex Operations West, Inc. v. Sup. Crt. Of Los Angeles County (2018) 4 Cal. 5th 903. Departing from a vague standard employed since 1989 established in a prior ruling, S.G Borello & Sons, Inc. v. Dept. of Ind. Relations (1989) 48 Cal.3d 341, the Dynamex Court created a strict, three-part test to determine whether an employee could be classified as an independent contractor, which is cleverly termed the “ABC Test.”
The ABC Test, as set forth in Dynamex, poses the following three questions, all of which must be answered in the affirmative in order to determine a worker is an independent contractor:
Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance and the work in fact?
Part B: Does the worker perform work that is outside the usual course of the hiring business?
Part C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?
Part A focuses on the control of the hiring entity over the worker. And importantly, the courts will look not only at the contract and the control exemplified therein, but at the actual work and relationship between the worker and hiring entity irrespective of the contract. Dynamex, 4 Cal. 5th at 956-58. Part A embodies the most of the factors included in the prior 11 part test set forth in S.G Borello & Sons, 48 Cal.3d 341.
Part B is perhaps the most interesting and, for hiring entities, most troubling of the three parts. The courts will look to the work performed by the worker as compared to the work the hiring entity performs and the work employees of that hiring entity perform on its behalf. Dynamex, 4 Cal. 5th at 958-59. So, for example, a group medical practice is in the business of providing medical care and treatment to its patients. The medical practice may have one or more full time nurses who similarly care for the practice’s patients. If the medical practice then contracts with a nurse to perform similar work, that nurse is not an independent contractor under Part B of the ABC test because he/she is performing a function similar to that of the hiring entity and employees of the hiring entity. The example provided in Dynamex is as follows:
Thus, on the one hand, when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted  the plumber or electrician to provide services to it as an employee. On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter [*960] be sold by the company, the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees. In the latter settings, the workers’ role within the hiring entity’s usual business operations is more like that of an employee than that of an independent contractor.
Dynamex, 4 Cal. 5th at 959 [citations omitted].
Part C examines the worker, and there is a determination whether the worker engages in the profession or craft irrespective of the hiring entity. Dynamex, 4 Cal. 5th at 960. For the medical practice engaging a nurse as an independent contractor, the court will ask whether this worker engages in the same profession outside of the worker’s performance for the hiring entity. Of course, in most examples involving medical practices, Part C would, indeed, be quite easy to satisfy as providers and medical staff are independently licensed and customarily engaged in his/her profession irrespective of the hiring entity.
Assembly Bill 5 merely codifies the Dynamex case and, as set forth below, carves out some exceptions. Assembly Bill 5 will be added to the Labor Code as Section 2750.3, starting on January 1, 2020.
Section 2750.3 provides as follows:
2750.3. (a) (1) For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
- The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in
- The person performs work that is outside the usual course of the hiring entity’s
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work
Due to lobbying efforts, physicians, dentists, veterinarian, psychologists, accountants, architects, real estate agents, travel agents, graphic designers and investment advisors — along with many other professions — will not be subject to the strict employee rules under the new law. Other exemptions come with conditions. Commercial fishermen are exempt except from unemployment insurance. Barbers, cosmetologists and manicurists are exempt only if they set their own rates, are paid directly by clients and schedule their own appointments. Salespeople are exempt, provided their pay is based on actual sales rather than wholesale purchases or referrals.
The California Medical Association (“CMA”) published a newsletter in response to the passage of Assembly Bill 5, reminding its members of its successful lobbying efforts:
The bill could also have impacts in health care, but the California Medical Association (CMA) fought hard to ensure the interests of physicians were protected under the bill. CMA successfully secured an exemption for physicians from the legislation, arguing that the decision and the bill should be primarily focused on protecting lower-wage workers and that physicians should not be impacted by the codification of the Dynamex Case.
During the debate over the bill, a question was raised as to whether AB 5 would impact California’s bar on the corporate practice of medicine. It does not. The exemption made explicit in AB 5 as it pertains to physicians is comprehensive, ensuring that physicians are not unduly influenced by a corporate entity when practicing medicine.
However, CMA acknowledges “other health care workers including physician assistants, nurses and behavioral health providers will be impacted by the bill.”
The biggest challenge for companies in the healthcare industry is complying with the requirement in Part B of the ABC Test – that the worker performs work that is outside the usual course of the hiring entity’s business. A medical practice clearly is in the business of providing healthcare services to its patients. So, any individual who works for the practice and provides healthcare services, such as a nurse, very likely would be considered an employee under the ABC test. As a result, the only individuals who definitively would be deemed to be properly classified as independent contractors would be individuals who perform services unrelated to healthcare, such as a plumber performing plumbing services at the healthcare business’ facilities. Consequently, locum tenens likely will need to be classified as part-time employees and not independent contractors.
Medical practices, medical groups, surgery centers, and other healthcare industry businesses must examine their current hiring practices and present staff in light of the Dynamex ruling and Assembly Bill 5. Failure to abide by the law will result in substantial penalties and fines, in addition to perhaps owing back payroll taxes, wages and benefits. The financial risk is onerous.
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Richard E. Haskin is a partner with the firm. Mr. Haskin has a lengthy and impressive history as a litigator in commercial, construction, real estate, and general liability matters in both California and Nevada federal and state courts. His practice concentrates on all phases and legal aspects related to the formation, development, syndication, construction and operation of outpatient surgery centers and private medical practices. Mr. Haskin counsels outpatient surgery centers, medical clinics, private medical practices, and physicians. Mr. Haskin often serves as outside general counsel, serving client needs in several health care related areas, including regulation, compliance, and employment. Mr. Haskin is respected in Southern California and Nevada as a leading authority in the field of health care regulation and compliance. His practice necessarily includes a focus on Medicare/Medicaid law, including the Medicare/Medicaid Fraud and Abuse Statutes, all related Safe Harbor opinions, the Stark Act, and related and state laws.