Today, September 18, 2019, AB5 was signed into CA law by the Governor. AB5 embraces and codifies the so called “ABC Test” from the California Supreme Court decision of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (April 30, 2018) as the proper CA test for determining if a worker may be classified as an independent contractor or as an employee, and also exempts some specific types of professions and businesses from the ABC Test.
The ABC test, in a nutshell, provides that a worker must be classified as an employee unless all three of the following tests are satisfied: (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; (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. The B-Test has been the most controversial and has caused many former independent contractors to no longer be able to be properly classified as such.
AB5 provides for five groups of professionals and businesses who are exempt from the ABC Test. What test will be used to determine whether a worker may be classified as an independent contractor or as an employee depends on which grouping the professional or business is included in. Some groupings will be subject to the Borello Test, which is a multi-factor balancing test that has been used for decades to determine if a worker can be classified as an independent contractor or as an employee. The Borello Test’s most important factor is similar to the A-Test of the ABC Test, that is, freedom from control and direction. There are other factors too, but no one factor is necessarily determinative of the outcome. The Borello Test, unlike the ABC Test, is subject to subjectivity and interpretation. Other groupings will be subject to multi-factor tests actually specified in AB5.
Here is a list of professionals who are granted exemptions from the ABC Test in AB5: CA licensed Physicians, CA licensed Surgeons, CA licensed dentists, CA licensed podiatrists, CA licensed psychologists, CA licensed insurance agents, SEC registered or FINRA or CA licensed financial advisors, CA licensed lawyers, CA licensed private investigators, CA licensed accountants, CA licensed engineers, CA licensed veterinarians, direct sellers, commercial fishermen, marketing professionals, human resources administrators, travel agents, graphic designers, grant writers, fine artists, U.S. Treasury Department licensed enrolled agents, payment processing agents through independent sales organizations, photographers (who don’t work in motion pictures, and who don’t submit more than 35 times per year to the same employer), photojournalists (who don’t work in motion pictures, and who don’t submit more than 35 times per year to the same employer), freelance writers (who don’t submit more than 35 times per year to the same employer), freelance editors (who don’t submit more than 35 times per year to the same employer), freelance newspaper cartoonists (who don’t submit more than 35 times per year to the same employer), CA licensed hairstylists and barbers, CA licensed estheticians, CA licensed electrologists, CA licensed cosmetologists, CA licensed real estate licensees (e.g., loan brokers and real estate agents), CA licensed repossession agents, and some CA licensed individuals performing work under subcontracts in the construction industry.
Also, AB5 provides a test for determining independent contractor status in a bonafide business-to-business relationship. The conditions that must be met for independent contractor status are (all must be true):
(A) 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.
(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.
(C) The contract with the business service provider is in writing.
(D) 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.
(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.
(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(G) 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.
(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
(I) The business service provider has no other financial relationships with the contracting business.
(J) The business service provider can negotiate its own rates.
(K) The business service provider can set its own hours and location of work.
(L) The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required.
AB 5 also discusses when a relationship between a referral agency and a referred professional may be one of independent contractor and not employee.
AB5 will become effective on January 1, 2020, but its provisions will be applied retroactively to existing claims and actions filed before its effective date. Moreover, Section 6 of AB5 provides: “No provision of this measure shall permit an employer to reclassify an individual who was an employee on January 1, 2019, to an independent contractor due to this measure’s enactment.” Section 6 will no doubt be troubling to many employers who otherwise will find relief in the provisions of AB5.
–Adam K. Treiger, Esq.