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AB 5 – CA’s New Independent Contractor Law Part 3 of 3

by D. Gregory Valenza | | September 23, 2019

OK, let’s wrap up this long discussion of AB 5. 

  1. The 2750.3(a)(2) / Wage Order 2 Gotcha

Subdivision 2750.3(a)(2) says:

any exceptions to the terms “employee,” “employer,” “employ,” or “independent contractor,” and any extensions of employer status or liability, that are expressly made by a provision of this code, the Unemployment Insurance Code, or in an applicable order of the Industrial Welfare Commission, including, but not limited to, the definition of “employee” in subdivision 2(E) of Wage Order No. 2, shall remain in effect for the purposes set forth therein.

So that means if there are express provisions in a wage order definition or the Labor Code or the Unemployment Insurance Code concerning the definition of employee / employer / independent contractor, etc., those are preserved after AB 5.  As you can see, the law calls out “the definition of employee in subdivision 2(E) of Wage Order 2:”

(E)“Employee” means any person employed by an employer, and includes any lessee who is charged rent, or who pays rent for a chair, booth, or space; and
(1)Who does not use his/her own funds to purchase requisite supplies; and
(2)Who does not maintain an appointment book separate and distinct from that of the establishment in which the space is located; and
(3)Who does not have a business license where applicable.

I suppose this provision in Wage Order 2 is referring to certain beauty salon workers who will be counted as employees, no matter what AB 5 says.  It’s just an example. The point is that there are 17 Wage Orders and they may have different definitions of “employer” and “employee” that you should review to see if there are special provisions.  In addition, as I said in part 1, the Unemployment Insurance Code and Labor Code may contain special definitions that will trump AB 5. So, be on the lookout for those when drafting agreements. 

2.  Referral Agency

Subdivision 2750.3(g) exclude from the ABC Test the relationships between certain “referral agencies” and “service providers” defined in the law, under certain conditions.  Rather Borello will apply, but the “referral agency” has to prove:

(A) The service provider is free from the control and direction of the referral agency in connection with the performance of the work for the client, both as a matter of contract and in fact.
[ This is Borello‘s right to control test]
(B) If the work for the client is performed in a jurisdiction that requires the service provider to have a business license or business tax registration, the service provider has the required business license or business tax registration.
[The service provider has to have a business license if one is required]
(C) If the work for the client requires the service provider to hold a state contractor’s license pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code, the service provider has the required contractor’s license.
[The service provider has a contractor’s license if the type of work requires it]
(D) The service provider delivers services to the client under service provider’s name, rather than under the name of the referral agency.
(E) The service provider provides its own tools and supplies to perform the services.
(F) The service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed for the client.
(G) The service provider maintains a clientele without any restrictions from the referral agency and the service provider is free to seek work elsewhere, including through a competing agency.
(H) The service provider sets its own hours and terms of work and is free to accept or reject clients and contracts.
(I) The service provider sets its own rates for services performed, without deduction by the referral agency.
(J) The service provider is not penalized in any form for rejecting clients or contracts. This subparagraph does not apply if the service provider accepts a client or contract and then fails to fulfill any of its contractual obligations.

The remaining items above seem self-explanatory.

For this subdivision, a “referral agency” is a business that connects clients with service providers that provide graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, or yard cleanup.

So, not every service provided by a referral agency will qualify under this subdivision it seems.  Referrals for “minor” home repair count. But what is “major” home repair? Plumbing? Painting? Not sure. “Tutoring” counts, but what about music lessons? So confused. How about you?  Angie’s gonna need a new list. 

Note, also, that a “service provider” has to be set up as a business, even if it’s just a one-person business. According to the statute, an “individual worker” who takes on work through a referral agency is evaluated under the ABC Test per subdivision (a).  Hence, the “referral agency” has to make sure the service provider is set up and registered as an ongoing business to avoid potential employment liability.

3. Motor Club

Subdivision 2750.3(h) makes it clear that “motor clubs” (like AAA?) are not the employers of the tow truck companies that are sent to rescue stranded drivers under the ABC Test, if the tow truck companies are separate entities under Borello.  Yeah, you read that right.

(h) Subdivision (a) and the holding in Dynamex do not apply to the relationship between a motor club holding a certificate of authority issued pursuant to Chapter 2 (commencing with Section 12160) of Part 5 of Division 2 of the Insurance Code and an individual performing services pursuant to a contract between the motor club and a third party to provide motor club services utilizing the employees and vehicles of the third party and, instead, the determination whether such an individual is an employee of the motor club shall be governed by Borello, if the motor club demonstrates that the third party is a separate and independent business from the motor club.

4. No Re-Classifying Employees as Contractors to Take Advantage of AB 5

An uncodified section of AB 5, called “section 6” of the Bill, prohibits re-classifying an employee as an independent contractor based on the fact that AB 5 was enacted, if the worker was an employee as of January 1, 2019.  So, any sneaky employer looking to capitalize on all that legislative generosity in this bill, take heed.

5.  Some Final Thoughts for Now   

  1. Remember, an exclusion from the ABC Test generally means only that the Borello test applies, as it always did in the past.  Borello was never an easy ride to independent contractor status. So, it pays to understand what it takes to satisfy Borello.  (Read Part 1 of this series.)  Many cases have been decided since Borello.  So, the law is well-developed regarding what counts as an independent contractor when Borello applies. 
  2. Remember, also, that federal law is unchanged by California law. The IRS has its own independent contractor test.  Other federal agencies, like the NLRB, have one as well.  
  3. In addition to satisfying the Borello test, some of the exclusions impose additional requirements (like having a business license).  It is important not to be tripped up by these requirements, especially technicalities. 
  4. In all cases it is critical to have a properly drafted independent contractor agreement, that is tailored for AB 5 and the applicable exclusions.  The agreements that were drafted for Borello have to be modified to fit within the particular AB 5 exclusions now.  Don’t try this at home.  (See # 3). 
  5. Don’t forget the big AB 5 Pitfall Covered at the top of this post, subdivision 2750.3(a)(2): Notwithstanding paragraph (1), any exceptions to the terms “employee,” “employer,” “employ,” or “independent contractor,” and any extensions of employer status or liability, that are expressly made by a provision of this code, the Unemployment Insurance Code, or in an applicable order of the Industrial Welfare Commission, including, but not limited to, the definition of “employee” in subdivision 2(E) of Wage Order No. 2, shall remain in effect for the purposes set forth therein. What does that mean?  It means that if another law says that, oh, for example, a “work made for hire clause” in an NDA contract is presumptive evidence of “employee” status (hint hint), that law remains in full force. (So, see # 3). 

Well, that’s it for now.  We’ll probably have some more to say, and probably charge for it 🙂 Until then, please be careful out there. Call a legislature. Or call a trade association or a lobbyist, or get a new one, and get on that exclusion list next time!  


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