OK, AB 5 was just signed into law. It’s very long. You can read it in final form here.
First, some general comments. What we’re going to accomplish here (I hope) is to provide some guidance as to what the law covers, and what tools are required to understand how the law is going to work. This post covers most of the law. I will cover the rest, including the confusing “business-to-business” section, in Part 2.
Even if I accomplish my goal, readers responsible for classifying workers probably should obtain legal advice. But at least you’ll be able to understand better what your lawyer tells you. And you’ll better be able to understand if your lawyer is on top of things. That’s the objective, anyway.
Now, I’m not even going to pretend to address every scenario that arises under this law. Why? Well, I have ground glass to eat and obligations of my own and such. Seriously, the law is complex, and many definitive answers are industry- and employer-specific. In fact, even the bill’s effective date is not straightforward. On the one hand, the independent contractor legal standards in general aren’t changing. They are based on existing case law (principally two California Supreme Court cases). So, much of the law already was in effect and so that part of the law is “retroactive.” Independent contractor-employee disputes that were already covered by the Dynamex case and the ABC Test therefore will continue (such as claims arising under violations of Wage Orders).
What is changing, and in a big way, is which standard applies to what situation. That is, AB 5 sets out how the ABC Test applies to particular businesses and individuals, and how it applies to particular claims. So, the law’s exceptions and exclusions may take effect at different times, The law also contains specific retroactivity provisions that are confusing and that may affect existing claims and relationships, depending on the section that applies.
Bottom line: Much of the law will take effect on January 1, 2020, if it doesn’t apply already. Other parts take effect in July 2020. A few parts will sunset or expire. Most will not. We will have to see what the courts say as litigation unfolds.
In general, the plan for employers should be the following:
- assess independent contractor relationships
- determine if they can exist under the new law
- fix them if they can exist, and / or
- if they cannot exist, plan for how to convert contractors to employee status to mitigate potential liability.
Why are you still reading? Like, now! OK, first you can read the rest of the post.
Here is a summary of what you have to know:
- You Have to Know the ABC Test and the “Borello” Test.
Remember, last year, the California Supreme Court held in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 that independent contractor status in some circumstances would be evaluated under the so-called “ABC” Test. The employer has the burden of proof. If one of the three elements of the ABC test fails, the worker is an employee. What is the ABC Test? We blogged about it (here) and wrote an article (here). OK, one more time, just for you:
(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;
(B) that the worker performs work that is outside the usual course of the hiring entity’s 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.
If the ABC Test applies, chances are it will be difficult to find an independent contractor relationship for many types of independent engagements.
Now, what makes AB 5 dangerous for employers is that it drastically expands when the ABC Test will apply. Therefore, it eradicates many independent contractor possibilities. The California Supreme Court held that the ABC Test applied only to claims brought under the Industrial Welfare Commission Wage Orders. But AB 5 now makes the ABC Test applicable to any claim under the Labor Code (including Workers’ Comp, eventually), or any unemployment claim, unless an exclusion applies (discussed below).
The Borello test is based on another California Supreme Court decision, S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989). The Borello test is the principal way courts evaluated the bona fides of independent contractor relationships before Dynamex endorsed the ABC Test, and before AB 5.
The Borello test will continue to loom large, even under AB 5. It is a multi-factor analysis, that focuses on “economic realities.” The most important factor is the hiring entity’s “right to control” the contractor (akin to Factor A of the ABC test). In addition, the courts consider a number of other factors, many of which are relevant to the ABC Test as well. But, unlike the ABC Test, not every factor has to be present when the Borello test is applied. You can read more about the Borello test here.
2. AB 5 – General Rule
AB 5’s general rule is codified at Labor Code section 2750.3(a). It says:
(a) (1) For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, 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:
See the ABC Test built right into the law? So, that means that unless one of the exceptions / exclusions in the rest of the law applies, the ABC Test controls whether a worker is an independent contractor or employee, anywhere in the Labor Code or the Unemployment Insurance Code.
Below are several of the exclusions and when they apply. I will cover the rest of them in the next post.
3. Specific Exclusions – Drs., Lawyers, Licensed Professionals, Other Professionals, and More
Section 2750.3(b) contains specific exclusions to the general rule. The analysis of whether someone is an independent contractor or employee will be controlled by Borello, not the ABC Test, for the following types of workers:
4.Specific Exclusions – Professional Service Contractors (HR Consultants, Still Photographers, Freelance Writers and Others]
Section 2750.3(c ) excludes from the ABC Test a number of service providers who meet the following criteria. Borello, of course will apply once the contractor and hirer meet the following elements of the law.
N.B., Performing services at a separate location could support independent contractor status under Borello, even though this section does not prohibit working at the hiring entity’s location. Note also this section requires the service provider to have a business license.
Now, who are the lucky (or well-represented by lobbyists) professionals who may take advantage of this exception?
5. Specific Exclusion – Real Estate Agents and Repossessors
Section 2750.3(d) excludes from the ABC Test
“A real estate licensee licensed by the State of California pursuant to Division 4 (commencing with Section 10000) of the Business and Professions Code . . . .” The determination of independent contractor status either will be governed by 10032 of the Business and Professions Code, or several statutes or Borello if that section does not apply.
A repossession agency licensed pursuant to Section 7500.2 of the Business and Professions Code, for whom the determination of employee or independent contractor status shall be governed by Section 7500.2 of the Business and Professions Code, if the repossession agency is free from the control and direction of the hiring person or entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
Real estate businesses should take a hard look at section 10032 of the BPC to see if they can qualify their salespersons under that section.
6. The “Business to Business” Provision
As someone once said, “A camel is a horse, designed by a committee.” Why do I bring this up? Oh, no particular reason. Now where were we?
Oh, right. AB 5. So, section 2750.3(e) expressly says it does not apply to agreements between individuals and businesses. Wait. Isn’t that what independent contractor problems are all about? Well, yes. That’s what most people thought until yesterday. But here we are. Looking at section 2750.3(e).
Subsection (e) expressly excludes individuals and expressly includes certain contracts between business entities. Why? What will happen? What does this all mean? I do not know. I do not think the Legislature knows. And I do not know if the Courts will know. So, this section deserves its own post, which I promise will be…. spicy. Give me a couple of days to let it marinate, and let me calm down.
7. Contractors and Employees of Subcontractors
Section 2750.3(f) excludes from the ABC Test the relationship between prime contractors and subcontractors‘ employees. Again, weren’t we talking about whether a contractual relationship was independent versus employer-employee? We thought so. But the Legislature decided that the relationship between prime contractor and subcontractor will be determined by Borello and Labor Code section 2750.5, but only if the contractor can prove the following:
8. Special Note Re: Workers Compensation
The Workers’ Compensation Act is in the Labor Code. The Legislature expressly applies Section 2750.3 and its exceptions etc. to the Workers’ Compensation Act by enacting Labor Code section 3351 as part of AB 5. That section is not retroactive, and will take effect July 1, 2020. The point is that the Workers’ Compensation Appeals Board will have to use Section 2750.3 (the ABC Test or an exclusion) to determine whether someone is entitled to workers’ compensation benefits (as an employee) or not (as an independent contractor).
Next Post – AB 5 Part 2 – Coming Soon.
In my next post, I will cover the “business to business” issue, the remaining exclusions, and some additional analysis of this statute.