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.
Exemptions
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.
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Exempt Occupations
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“Professional Services” Exemptions
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Business-to-Business Exemptions
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- Licensed insurance agents
- Physician and surgeon (CA licensed)
- Dentist (CA licensed)
- Podiatrist (CA licensed)
- Psychologist (CA licensed)
- Veterinarian (CA licensed)
- Lawyer (CA licensed)
- Architect (CA licensed)
- Engineer (CA licensed)
- Private investigator (CA licensed)
- Accountant (CA licensed)
- Registered securities broker-dealer or investment adviser or their agents and representatives
- Direct sales salesperson (per Section 650 of the Unemployment Insurance Code)
- Commercial fisherman
- Real estate licensee (CA licensed)
- Workers performing repossession services for repossession agencies
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- Marketing, provided that the contracted work is original and creative in character and the result of which depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the contracted work
- Administrator of human resources (provided certain criteria are met)
- Certain travel agents
- Graphic design
- Grant writer
- Fine artist
- Services provided by an enrolled agent who is licensed by the United States Department of the Treasury
- Payment processing agent through an independent sales organization
- Still photographer or photojournalist who does not license content submissions to the putative employer more than 35 times per year (does not apply to motion picture work)
- Services provided by a freelance writer, editor, or newspaper cartoonist who does not provide content submissions to the putative employer more than 35 times per year
- Services provided by a licensed esthetician, licensed electrologist, licensed manicurist, licensed barber, or licensed cosmetologist provided that the individual:
- Sets his or her own rates, processes his or her own payments, and is paid directly by clients;
- Sets his or her own hours of work and has sole discretion to decide the number of clients and which clients for whom he or she will provide services;
- Has his or her own book of business and schedules his or her own appointments; and
- Maintains his or her own business license for the services offered to clients.
- If the individual is performing services at the location of the hiring entity, then the individual issues a Form 1099 to the salon or business owner from which he or she rents business space.
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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:
- The business service provider is free from the control and direction of the contracting business entity, 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 business service contract 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 that is 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 as that involved in the work performed;
- 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;
- The business service provider negotiates its own rates;
- The business service provider sets 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.
Note: This subdivision does not apply to an individual worker, as opposed to a business entity.
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Additionally, all of the below factors must be met for the exemption to apply to the above listed “professional services”:
- The individual maintains a business location (may be residence) that is separate from hiring entity. The individual may choose to perform services at the hiring entity’s location;
- If work is performed more than six months after January 1, 2020, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in his or her profession;
- The individual has the ability to set or negotiate his or her own rates for the services performed;
- Outside of project completion dates and reasonable business hours, the individual may set the individual’s own hours;
- The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other customers as available to perform the same type of work; and
- The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.
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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.
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