Watch my FREE AB5 WEBINAR on-demand to learn about “AB5 and the ABC Test for independent contractors.”
What You Will Learn
In this AB5 webinar you will learn about:
- The new ABC test for independent contractors.
- Which professions/categories of workers are exempt from the ABC test.
- How to keep those excepted categories independent contractors.
- Consequences for misclassifying workers, including individual liability.
- What you can do to minimize exposure.
Did You Get a Letter from the EDD?
California companies received a letter from the EDD about AB5 (Assembly Bill 5) and the ABC test in Dynamex v. Superior Court. Many business owners are hearing about the expansion of the new independent contractor test for the first time just days before the law went into for the New Year on January 1, 2020.
Are you trying to wrap your head around the new AB5 rules and asking the following questions?
- Do I have to convert independent contractors to employees?
- Can I keep independent contractors as contractors?
- How do I keep independent contractors a contractors?
- What are the risks of misclassifying independent contractors?
AB 5 was the big bill to watch this year. With the Governor signing it into law, the bill expands the California Supreme court’s ABC test for independent contractors outlined in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex) beyond claims for wages and benefits under the wage orders to those for unemployment benefits and the Labor Code generally (with many many exceptions). Here’s a quick summary of the ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles:
Anyone who performs services of a hirer is presumed to be an employee unless they meet the “ABC” test for independent contractors.
What is the ABC Test?
The ABC Test to show that someone is an independent contractor requires a showing that the worker is:
A) free from the control and direction of the hiring entity in the performance of the work;
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. Read more about Dynamex (before AB5).
The Borello Test
However, there is a long list of occupations that are exempt from the ABC test and on which the old multi-factor independent contractor test from S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello) applies instead. This is significant because it is much more difficult for someone to be properly classified as an independent contractor under the ABC test than the Borello test. Read more about Dynamex (before AB5).
Some of the occupations that will be analyzed under the old Borello test, include but are not limited to:
1. certain licensed health care professionals (physician and surgeon, dentist, podiatrist, psychologist, veterinarian),
2. Licensed attorney, architect, engineer, private investigator, or accountant;
3. Registered securities broker-dealers or investment advisers;
4. Direct sales salespersons (if they meet certain criteria);
5. Real estate licensees;
6. Workers providing licensed barber or cosmetology services if they meet the following requirements: set their own rates, process their own payments, are paid directly by clients, set their own hours and have the sole discretion to decide the number of clients and which clients they want, have their own book of business and schedule their own appointments, have their own business license for services offered to clients, and issue a 1099 to the salon or business owner from which they rent their business space. (Note: after January 1, 2022, licensed manicurists would be analyzed under the more restrictive ABC test); and
7. Others performing work under a contract for professional services such as marketing (if certain requirements are met); administrator of human resources (if certain requirements are met); graphic designer; enrolled agent licensed by the US Department of Treasury; payment processing agent through an independent sales organization; photographer or photojournalist who doesn’t license to a putative employer more than 35 times a year; another business entity (if certain very specific requirements are met, one of which is the requirement of a written agreement); or pursuant to a subcontract in the construction industry (if certain requirements are met).
Prepare for the new AB5 Requirements
The passage of AB5 will require companies to pay for unemployment and disability insurance for many more people who used to be properly classified as independent contractors. This is the perfect time to make a list of your independent contractors (even if they’re legitimately incorporated because the new laws have strict requirements even when the contractor is incorporated) and determine whether 1. They fall under an occupation that is exempt from the ABC test; 2. Whether you meet all the requirements to use the Borello test; and 3. Whether they may remain independent contractors under whichever test applies.
If you aren’t sure where to start or need help with the analysis, register for my Free Webinar or schedule a call with me.
This post was updated on 1/3/20.