New Law Regarding Independent Contractor Status

Cautionary Note

Assembly Bill 5 is new legislation. As with all legislation, it sets forth general rules that will be picked apart in the coming years by various courts that analyze its provisions. As of today, only one court case has issued analyzing AB 5 (Cal Trucking Association v. Becerra, dealing with the application of the law to truckers). Many more will come. It is possible that a court interpretation of AB5 will issue that expands or limits interpretation of a specific provision. It is also a controversial bill that is likely to be challenged by various employment and employee groups. So, it is advisable that regular analysis be conducted to ensure your business is compliant.

Labor Law History

In March 1989, the Borello case issued, setting forth guidelines for designating a party as an employee versus an independent contractor. For years, various employment entities abused the independent contractor label, utilizing it to avoid paying its employees fair wages or complying with standard labor laws. In April 2018, the revolutionary Dynamex court decision issued, setting forth a much stricter standard for who can be considered an independent contractor.

The California legislature responded to Dynamex with AB 5, codifying parts of the case but carving out additional explanation and exceptions. Assembly Bill 5 has been added as Section 2750.3 of the California Labor Code.

Presumption and the ABC Test

Labor Code Section 2750.3 provides:

(a)(1) “. . . a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions 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.

(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.

This means the presumption is that everyone working for you is an employee. You bear the burden of proving otherwise, by showing that all three of the ABC elements are met.

Element (A) is testing the autonomy of the worker. Both in any written contract, and in reality, the worker should be as free as possible to provide the services in question. There is no magic rule here. But the more freedom the worker has (working when and where desired, ability to conduct work in their own style, etc.), the better.

Element (B) is testing whether the person’s work is separate from your usual business. For a manufacturing business, then, someone who provides quite separate work (marketing, legal services, etc.) is more likely to meet this element than, say, a worker brought in to manufacture product.

Element (C) is testing whether the worker regularly engages in the type of work for which they have been hired. An architect providing architectural work. An interior designer providing design services. Etc.

If you are able to prove all three of the ABC test elements, then your worker is an independent contractor, and it is proper for you to treat them as such. If not, the next step is to review whether an exception applies. Where no exception applies, the worker is your employee.

Exceptions

There are several exceptions to the presumption and ABC test. If met, then the Borello test (i.e. the status quo prior to the Dynamex case and this new law) will determine whether the worker is an independent contractor or employee. 

Borello called for the courts to weigh all the factors of an employment situation to determine whether the worker was more accurately categorized as an employee or independent contractor. Borello set out eleven factors to consider, the first being given the most weight: 1) whether the worker is engaged in an occupation or business that is distinct from that of the company hiring them; 2) Whether the work is part of the company’s regular business; 3) whether the company or the worker supplies the equipment, tools, and the place for the person doing the work; 4) the worker’s financial investment in the equipment or materials required to perform the work; 5) the skill required in the particular occupation; 6) the kind of occupation, considering whether in that geographic area the work is usually done under the company’s direction or by a specialist without supervision; 7) the worker’s opportunity for profit or loss depending on their own managerial skill; 8) how long the services are to be performed; 9) the degree of performance of the working relationship; 10) the payment method (by time versus per job); and 11) whether the parties believe they are creating an employee/employer relationship.

a) Catch-All Exception

If the ABC test cannot be determined by a court of law, then it may order the Borello test applied to determine whether a worker is an employee or independent contractor. Labor Code § 2750.3(a)(3).

b) Special Occupation Exception

The Borello test also applies to the following (Labor Code § 2750(b)):

-A person or organization licensed by the Department of Insurance;

-A physician and surgeon, dentist, podiatrist, psychologist, or veterinarian;

-In individual licensed in California practicing as a lawyer, architect, engineer, private investigator, or accountant;

-A securities broker-dealer or investment adviser;

-A direct sales salesperson;

-A commercial fisherman working on an American vessel; or

-A newspaper distributor working under contract.

c) Professional Services Contracts Exception

The Borello test also applies if the worker is hired under a contract for “professional services” if the hiring business can prove all of the following factors (Labor Code § 2750(c)(1)):

(A) The worker maintains a business location, which may include their residence, that is separate from the hiring entity. (note: the worker may perform the services at your location, they just need to maintain a separate business location);

(B) If the work performed on or after June 1, 2020, the worker has a business license and any professional licenses required in their field;

(C) The worker has the ability to set or negotiate their own rates for the services performed;

(D) Outside of project completion dates and reasonable business hours, the worker has the ability to set their own hours;

(E) The worker is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work; and

(F) The worker regularly exercises discretion and independent judgment in the performance of the services.

Note that the worker can be working as an individual or through operation of a business entity (like a partnership, corporation, LLC, etc.).

BUT, to qualify under this “professional services” exemption, the “professional services” offered must be one of the following: (i) marketing; (ii) human resources administration; (iii) travel agent services; (iv) graphic design; (v) grant writing; (vi) fine artist; (vii) services by an IRS-enrolled agent; (viii) payment processing; (ix) services provided by certain photographers and photojournalists; (x) services provided by a freelance writer, editor, or newspaper cartoonist; or (xi) certain esthetician services.

d) Business and Professions Code Professions Exception

The Borello test also applies to real estate licensees and repossession agents, which are professions exempted under the California business and Professions Code. Labor Code § 2750.3(d).

e) Bona Fide Business-To-Business Contracting Relationships Exception

Borello will apply to bona fide business-to-business contracting relationships, defined as a business entity (sole proprietorship, partnership, LLC, LLP, or corporation) that contracts to provide services to another business entity, if all of the following are met (Labor Code § 2750(e)):

(A) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of work (according to the written agreement and in reality);

(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) The business service provider has any required business licenses or business tax registrations;

(E) The business service provider maintains a business location separate from the contracting business’s work location;

(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work they’re hired to perform;

(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 provides its own tools, vehicles, and equipment to perform the services;

(J) The business service provider can negotiate its own rates;

(K) The business service provider can set its own hours and location of work*the nature of the work will be considered in this factor, as certain types of work require certain hours or location to be properly conducted; and

(L) The business service provider is not performing the type of work that requires a license from the Contractor’s State License Board.

f) Contractor/Subcontractor Exception

Borello will apply to certain relationships between a contractor and an individual performing work pursuant to a subcontract in the construction industry. Labor Code § 2750.3(f).

g) Referral Agency Exception

Certain workers use referral agencies to connect with clients. Borello controls the determination of whether the worker is an employee of the referral agency if certain criteria are met. Labor Code § 2750.3(g). 

h) Motor Club Exception

A motor club holding a certificate of authority and an individual performing services for the club will be governed by Borello under certain circumstances. Labor Code § 2750.3(h).