The California legislature has now passed AB 5 and, if Governor Gavin Newsom signs the bill into law as expected, California will effectively ban nearly all categories of independent contractors – not just gig economy workers. AB 5 will become effective on January 1, 2020 for all businesses that contract with individuals who perform services in California.
Here is a summary of the law and what businesses need to do now:
AB 5 adds Section 2750.3 to the California Labor Code to codify the “ABC” test for determining whether a worker is a contractor or an employee. (Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County) The ABC test presumes that a worker is an employee unless the hiring entity establishes the following three conditions:
- 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.
- The person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
If the worker does not meet all three conditions, then the hiring entity must classify the worker as an employee. This standard of proof is both clearer and stricter than the federal guidelines regarding independent contractor status.
Section 2750.3 would exempt certain workers and situations—instead subjecting them to the “common law” independent contractor test in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (“Borello”). The Borello test evaluated multiple factors and did not require all factors to be met to establish independent contractor status. The principle factor under Borello is whether the “person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.”
Below is a nonexclusive chart of AB 5’s exemptions. The selected occupations listed below will be evaluated under the old “common law” Borello test and will not be subject to the new “ABC” Dynamex test.
“Professional Services” Exemptions
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A bona fide business-to-business contracting relationship, is exempt from the “ABC” test if the contracting business demonstrates that all of the following criteria are satisfied:
Note: This subdivision does not apply to an individual worker, as opposed to a business entity.
Additionally, all of the below factors must be met for the exemption to apply to the above listed “professional services”:
What businesses need to do now:
Immediately assess who will be working for your business on a go-forward basis: do you contract with any individuals as independent contractors or consultants? Does your workforce planning include the issuance of 1099 next year? Does your budget encompass payroll and other taxes associated with an increased workforce?
If your business plans to contract with individuals next year, do they fall under any of the law’s exemptions? Examples of those exemptions in the bill include physicians, dentists, and psychologists (if state-licensed and providing services to a health care entity); state-licensed lawyers, architects, engineers, veterinarians, accountants, securities broker-dealers, investment advisors, insurance brokers, and commercial fisherman.
If the individual does not fall within a specific exemption, does the individual qualify as a “professional services contractor” – “sole proprietors” who operate a business, have a business license, and satisfy the traditional tests of independent contracting, such as the ability to set rates, hours, and terms of services?
The Mintz ELB group in California is available to assist your business in its AB 5 compliance efforts.