Changing the Nature of Work: California’s Passage of AB 5 for Independent Contractors
The legislature’s passage of Assembly Bill (AB) 5 on September 18, 2019, represents a shift in the nature of work in California. This article provides an overview of AB 5 and the two legal tests used to determine whether a worker can be classified as an independent contractor.
THE BASICS OF AB 5Effective January 1, 2020, AB 5 creates a broad presumption that all workers in California are employees. This presumption is only eliminated if the employer proves that the worker meets the appropriate legal test, which, if achieved, means the worker can instead be classified as an independent contractor rather than an employee.
The legislature created such a broad presumption in response to the proliferation of the “gig economy” in which individuals work multiple independent contractor jobs, such as the stereotypical Uber driver. It is claimed that the gig economy results in the loss of “significant workplace protections” to the misclassified worker, which are usually in the form of Social Security, workers’ compensation, unemployment insurance, disability insurance, and often paid sick days. At a fundamental level, though, these benefits are provided through payroll tax deductions from employee paychecks, which were largely being polarized by the gig economy.
As a seeming compromise for employers (albeit small), the very end of AB 5 states that any part of the new law that would result in a benefit to an employer will be deemed retroactive, while the rest of the new law is effective from January 1, 2020, onward.
THE ABC TESTAt the very beginning of AB 5, the law makes the ABC test applicable when “a person provid[es] labor or services for renumeration”, which means that any person being paid for providing work or a services to another will be considered an employee, unless the hiring entity (i.e., employer) can meet all elements of the ABC test:
A. 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 fact; and
B. The person performs work that is outside the usual course of the hiring entity’s business; and
C. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Please also note that these elements are highly fact-specific, and it is best to consult with an attorney to perform or assist in performing a widespread audit of all worker classifications.
THE BORELLO TEST (KIND OF)The remainder of AB 5’s expansive sections consist of various “exceptions” to the sweeping presumption of employee status as indicated above. Where an exception can be proven by the employer, the Borello test (or some variation of it) applies instead of the ABC test. In either event, the employer must still prove that the worker is not an employee under the applicable test.
The Borello test focuses on the degree of control exerted over the worker by the hiring entity (as in “A” of the ABC test), with eight secondary factors to be considered as well, each of which not being, by itself, enough to make a determination in either direction. For more on the Borello test, click here.
The first section of exceptions is a list of occupations (most of which require some sort of governmental licensure) in which the Borello test applies:
- A person or organization licensed by the Department of Insurance;
- A physician and surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the State and performing services related to such license;
- A lawyer, architect, engineer, private investigator, or accountant;
- A securities broker-dealer or other investment adviser licensed by the Securities and Exchange Commission or the Financial Industry Regulatory Authority;
- A direct salesperson (subject to a separate test in the California Unemployment Insurance Code); and
- A commercial fisherman working on an American vessel.
The second section of exceptions imposes another modified version of the Borello test for individuals working under a “professional services” contract, which is defined as a contract involving:
- Marketing or creative services;
- Administration of human resources (so long as the work is “varied” and not “standardized”);
- Travel agent services;
- Graphic design;
- Grant writing;
- Fine artists;
- Services by an individual licensed by the United States Department of the Treasury to practice before the Internal Revenue Service;
- Payment processing agents;
- Photographers (with specific restrictions);
- Freelance writers, editors, or newspaper cartoonists (with specific restrictions); and
- Services provided by licensed estheticians, electrologists, manicurists, barbers, or cosmetologists (subject to a sub-test that must be proven by the employer before even applying the Borello test).
The third and fourth sections of exceptions apply to licensed real estate agents and repossession agencies, and contracts for “bona fide” business-to-business relationships, respectively. In such situations, a modified and harsher version of Borello is applied. Exceptions also exist in later sections of AB 5 applicable to referral agencies and individuals providing services under a contract between a motor club and a third party for the servicing of vehicles.
EXCEPTION FOR THE CONSTRUCTION INDUSTRYThe construction industry has its own exception under AB 5, which, if proven by the employer, means that classifications are not determined by the ABC test. Instead, the Borello test and other relevant, statutory law govern such classifications. Since this exception is particularly complicated and involves regulations from other laws, it is important to seek the advice of an attorney to explain it further.
In general, this exception contains seven elements that must all be met; most notably, all subcontracts must be in writing and contain specific provisions related to insurance, business and/or tax licensure, and delegations of financial responsibility. Failure to meet these tests means that the ABC test governs, and it is therefore very likely that all workers will end up being employees due to the restrictive nature of the ABC test.
Furthermore, misclassifications in the construction industry can be particularly problematic because of the nature of job sites and the often long and varied working hours and conditions on these job sites. As such, the nature of this type of work is ripe for wage and hour lawsuits, especially in recent years. Thus, it is crucial in the construction industry to monitor potential liabilities like the new AB 5 law and address them rapidly.
WHAT IT ALL MEANSThe passage of AB 5 means that the nature of work in California is changing; the gig economy and employers are, in many ways, under fire. The legislature in the findings of AB 5 went as far as stating that the “misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise of income inequality”. Therefore, AB 5 forces employers (and employees) to be faced with several, fact-specific analyses in determining the details of the working relationship or risk legal and financial consequences.
For employers, it is vital that every worker’s classification be scrutinized to ensure compliance with AB 5 and avoid one of the costliest line items an employer can face: the wage and hour lawsuit. Furthermore, AB 5 empowers governmental agencies and city governments (in addition to the workers themselves) to sue employers for misclassification. In fact, the City of San Diego has already begun doing so: for more on this, click here. As such, California employers should consult with an attorney to perform an audit and correct any problematic classifications immediately.
For workers, it is important to understand the nature of their working relationship to determine if there is a misclassification. If a worker is misclassified as an independent contractor, then the hiring entity is liable for all unpaid wages and fringe benefits that would have been paid (and were not paid) if the worker had been properly classified as an employee, as well as penalties under the California Labor Code.
Moral of the story: AB 5 is a complicated and highly fact-specific law, so contact an attorney to see if and how this new law affects you. Call an experienced employment attorney at The Parkman Law Firm today for a free consultation.The legislature’s passage of Assembly Bill (AB) 5 on September 18, 2019, represents a shift in the nature of work in California. AB 5 has been hotly debated since the Dynamex decision in which the California Supreme Court seemingly abandoned the previous test for determining independent contractor classification (i.e., the Borello factors), in exchange for a newfound “ABC” test. AB 5 attempts to clarify how these two legal tests cohabitate, while also giving rise to new, unanswered questions and caution for California employers.