With the New Year, California rings in a lot of legislative changes, including a new standard for evaluating independent contractor classifications. Here is what you need to know:
Effective Jan. 1, 2020, Assembly Bill 5 (AB-5) became law in California by adding section 2750.3 to the Labor Code. AB-5 is the legislative response to the California Supreme Court decision in Dynamex v. Superior Court, which adopted a new three-part standard (the “ABC test”) for determining a contractor’s status under California’s Wage Orders.
Before Dynamex, companies used the eleven-part test set forth by the Supreme Court in Borello v. Department of Industrial Relations, which primarily focused on whether the contractor controlled the manner and means of performing the work. Through AB-5, the legislature codified the holding in Dynamex and expanded it to also include claims brought under the California Labor Code and Unemployment Insurance Code.
Unless an exception applies, a worker cannot be classified as an independent contractor in California unless the hiring entity can show all of the following:
- The worker is free from control and direction in the performance of services;
- The worker is performing work outside the usual course of the business of the hiring company; and
- The worker is customarily engaged in an independently established trade, occupation, or business.
The new law also enables the California attorney general, city attorneys and local prosecutors to seek injunctions against companies that misclassify workers.
The ABC test does not apply to a number of occupations. Where an exception applies, the working relationship between the hiring entity and worker will be analyzed under the eleven-factor Borello test.
The ABC test does not apply to the following occupations:
- Persons licensed by Department of Insurance;
- A physician and surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the State of California;
- A licensed lawyer, architect, engineer, private investigator, or accountant;
- A securities broker-dealer or investment adviser or their agents and representatives registered with the SEC or the Financial Industry Regulatory Authority or licensed by the State of California;
- Direct sales salespeople (must not be paid by the hour and must have written independent contractor agreements);
- Commercial fishermen;
- Individuals providing “professional services” (as defined in and who meet the criteria set forth in the Code);
- Referral agencies (as defined in and that meet the criteria set forth in the Code);
- Licensed real estate agents; and
- Repossession agencies.
An exception for construction subcontractors also exists if the following criteria are met:
- The subcontract is in writing;
- The subcontractor is licensed by the Contractors State License Board, and the work is within the scope of that license;
- If the subcontractor is domiciled in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor has the required business license or business tax registration;
- The subcontractor maintains a business location separate from the business or work location of the contractor;
- The subcontractor has the authority to hire and fire other persons to provide or to assist in providing the services;
- The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided; and
- The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.
Finally, a business-to-business exception exists when:
- The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The business service provider is providing services directly to the contracting business rather than to customers of the contracting business;
- The contract with the business service provider is in writing;
- If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration;
- The business service provider maintains a business location separate from the business or work location of the contracting business;
- The business service provider is customarily engaged in an independently established business of the same nature;
- The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity;
- The business service provider advertises and holds itself out to the public as available to provide the same or similar services;
- The business service provider provides its own tools, vehicles, and equipment to perform the services;
- The business service provider can negotiate its own rates;
- Consistent with the nature of the work, the business service provider can set its own hours and location of work; and
- The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required.
In light of these significant changes, employers are encouraged to review their independent contractor agreements and relationships to determine whether any of them need to be reclassified in 2020.