How California’s AB5 Will Impact You

Brian Reider
Best, Best and Reider Attorneys at Law

Starting January 1, Pretty Much Everyone Will Be a California Employee

It is likely that by now, all of you know that in 2018, a California Supreme Court case called Dynamex radically altered the definition of  “employee” to require that everyone who is subject to California’s Wage Orders be classified as an employee, rather than as an independent contractor, under the so-called “ABC” test. As difficult as that decision was for California employers, the Legislature has just made it far more challenging.

A new law called AB 5 has been passed by both the Assembly and the Senate, and is on the way to the Governor’s desk, and he has stated that he will sign it. When he does, effective January 1, 2020, with the exception of a very few categories, the ABC test will apply to everyone. The short list of exemptions is at the end of this message. If you are not on that list, you are going to be subject to the law no matter what size business you are.

There are far more implications to AB 5 than one short e-mail can cover, so I will have several on this. Let’s start with what the ABC test will mean to almost every employer beginning January 1, 2020. Anyone you classify as an independent contractor will be deemed an employee (and so will be under the wage and hour laws, subject to worker’s compensation requirements, and federal and state discrimination laws, among other things unless you can establish three things:

A. That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact [simple example – the plumber you bring in to fix a broken toilet is likely “free from control”, the “independent contractor” you have as your “outside IT department” is very likely under your control and direction];

B. That the worker performs work that is outside the usual course of the hiring entity’s business [simple example – if you make widgets, and the worker creates a model doodad for you, that worker is doing something “outside” your business, but if the worker powder coats your widgets that worker is not “outside” of your business]; and

C. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity [simple example – an outside professional [most of which are likely exempt under the list, below].

If you can’t prove all three to be true (and they are really tough), that person you thought was an independent contractor is really your employee. As I said, more on this will come in subsequent posts.

So who is exempt or possibly exempt? The list is short:

  • doctors, dentists, and veterinarians;
  • lawyers*, architects, engineers, private investigators, and accountants;
  • securities broker-dealers and investment advisers;
  • human resources administrators;
  • travel agents;
  • marketers, graphic designers, grant writers, fine artists, certain photographers or photojournalists, and certain freelance writers and editors.

There are also several classifications that carry certain conditions:

  • Commercial fishermen are exempt from all requirements except from unemployment insurance;
  • Estheticians, electrologists, manicurists, barbers, and cosmetologists are exempt but only if they set their own rates, are paid directly by clients, schedule their own appointments, and follow several other requirements more akin to independent workers than employees; and
  • Salespersons are exempt, but their pay must be based on actual sales as opposed to wholesale purchases or referrals.

* What did you expect?

D. Brian Reider is a partner in the Business Services practice group at Best Best & Krieger LLP. Based in Ontario, California, he provides business solutions for legal problems to private business clients, including manufacturing, distribution and technology companies.

Read SAC’s letter to Gov. Newsom in response to AB5.

Update September 27, 2019

The ABCs of the AB 5 B2B “Exemption”

Since my last post, the Governor signed AB 5 (a copy of the bill as signed is attached), and as of January 1, 2020, the determination as to whether a person is an employee or an independent contractor will be made under the “A-B-C” test which our Supreme Court had recently adopted as well.  I will be writing more about this change in the coming months, but today I want to focus on one particular “exemption” which might help some avoid the employee classification.  I put the word in quotes because it is not an automatic exemption, but rather just a way of avoiding the employee classification if a number of factors are satisfied.

This has to do with “B2B” (business to business) relationships, where a service provider supplies services to a contracting business.  This “exemption” only applies to entities which are “service providers” – defined as a “as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation”  (I am still trying to figure out how a “sole proprietor” – by definition, an individual – can be considered to be the same as the other legal entities.  My current thinking is that if a person is a sole proprietor, this is one more great reason to form at least a single-member LLC to remove all doubt.

The service provider may avoid being classified as an employee if all of these conditions are satisfied (my comments follow each factor in italic type):

1.  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 – this makes it critical that anyone acting as, for example, a consultant to a business, review its contracts to make sure they have “free from control and direction” language and that they can show that in fact they were “free from control and direction”.

2.  The business service provider is providing services directly to the contracting business rather than to customers of the contracting business – usually this will be pretty obvious, but if you are a service provider who might interface with customers, be very cautious – you may even want your contract to say that you will not be required to provide services to any customers.

3.  The contract with the business service provider is in writing – can’t help but wonder if a lawyer snuck this one in … this is an absolute requirement that there be no oral contracts.

4.  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 – this can be problematic – for service providers who provide services in many different jurisdictions, it means having to check with each one to see if a business license is required.

5.  The business service provider maintains a business location that is separate from the business or work location of the contracting business – while not explicitly stated, I would think that a home office location would qualify.

6.  The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed – I suspect this is aimed at businesses which declare a former employee (such as an IT person) to be an “independent contractor” even though the person only provide services for that business – this would be a no-no unless that person has their own business and provides services (or at least offers them) to others.

7.  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 – Two points here:  (a) be sure your contract has no restrictions regarding working for anyone else and (b) be sure you actually do work for someone else.

8.  The business service provider advertises and holds itself out to the public as available to provide the same or similar services – Be sure you do some form of marketing, and keep a record as to how you do it – even if you were always a “word of mouth” provider in the past.

9.  The business service provider provides its own tools, vehicles and equipment to perform the services – this will obviously vary depending upon what service is being provided

10.  The business service provider can negotiate its own rates – be sure you have documentation regarding rate negotiations.

11.  Consistent with the nature of the work, the business service provider can set its own hours and location of work – Some work is best done when the contracting business is not open; other work requires that they be open – this appears to allow for more flexibility depending on the context.

12.  The business service provider is not performing the type of work for which a license from the Contractors State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code – this expressly prohibits the “exemption” from applying to CSLB licensees.

Turning this around, if I were the owner of a business which wanted to contract for services, I would want to insist (1) that the provider be a legal entity (and not just a person), (2) that there be a written contract between us and (3) that all of the above 12 elements are clearly met.