In the fall of 2019, California Governor Gavin Newson signed Assembly Bill 5 into law. AB 5 went into effect on January 1, 2020. At its core, AB 5 shapes the current and future landscape of the independent workforce by potentially reclassifying millions of independent contractors as employees. California is the first state in the country to enact this type of legislation – which has far-reaching effects on workers for companies such as Uber, Lyft, Postmates, DoorDash, and Grubhub.
What Does AB 5 Change?
AB 5 codifies a 2018 California Supreme Court decision involving Dynamex Operations West, Inc. in which the ABC test was developed to determine whether an individual can be classified as an employee or an independent contractor.
Under the ABC test, a person is presumed to be an employee rather than an independent contractor unless they meet all three of the following criteria:
- (A) The worker is free from control and direction of the hiring entity in connection with the performance of the work, both in contract and in fact.
- (B) The worker performs work that is outside the usual course of the hiring entity’s business.
- (C) The worker is customarily engaged in independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Before the ABC test was developed, the standard test for determining independent contractor status was the Borello test, which asked whether “the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” Clearly, this is a tremendous change that will impact millions of workers.
Who is Exempt from AB 5?
Although AB 5 lays out the ABC test as the default method for determining independent contractor status, the Legislation does carve out a number of exemptions for specific industries, occupations, and providers of professional services. These exemptions are as follows:
- Physicians, surgeons, dentists, psychologists, or veterinarians performing in their clinical capacity or providing professional or medical services to a health care entity.
- Securities brokers, investment advisers, and agents that are registered with the Securities and Exchange Commission, the Financial Industry Regulatory Authority, or the State of California.
- Lawyers, accountants, and insurance brokers.
- Architects, engineers, and real estate agents.
- Private investigators, repossession agencies, and direct-sales persons.
- Commercial fishermen.
- Individuals performing services under a contract with a licensed “motor club.”
Professional Services Exemptions
AB 5 does also allow exemptions for certain providers of professional services. However, these individuals must meet qualifying criteria in order to be exempt. The qualifying criteria including having an established business location (which may be located within their home), having any required business or occupational licenses, and having the ability to negotiate their rates. There may also be occupation-specific qualifying criteria.
Professional services exemptions to AB 5 include the following workers:
- Marketing professionals
- Travel agents
- Graphic designers/artists
- Freelance writers
- Human Resources professionals
- IRS-licensed tax professionals
- Payment processing agents
- Fine arts professionals
- Barbers and cosmetologists
Construction Industry Exemptions
AB 5 provides special exemptions for companies working as subcontractors in the construction industry. To qualify for this exemption, the following criteria must be met:
- The subcontract must be in writing, with a properly licensed subcontractor, including licensing with the Contractors State License Board.
- The subcontractor must be “customarily engaged in an independently established trade” (carpenter, plumber, electrician, etc.).
- The subcontractor must also maintain a business location, separate from the hiring entity, be able to freely hire and fire its workers, and it must assume financial responsibility for mistakes in written warranties or indemnity agreements, or as evidenced by insurance or bonds.
There are additional special restrictions for subcontractors who provide trucking services.
Referral Agency Exemptions
AB 5 allows exemptions for businesses referring customers to providers for services such as:
- Graphic design
- Web design
- Picture hanging
- Home cleaning
- Minor home repair
- Errand completion
- Furniture assembly
- Event planning
- Animal services
- Dog walking
- Dog grooming
- Pool cleaning
- Yard cleanup
To qualify for this exemption, a business must be licensed, established, customarily perform this type of work, be free from control and direction of the referral agency, be free to work with other companies and maintain their own clientele without restriction from the referral agency and provide their services under their own business name, rather than that of the referral agency. They must also not be penalized for rejecting clients or contracts, and be able to set their own rates, decide their own hours and use their own tools.
Penalties for misclassification range from $5,000 to $25,000 for each violation, in addition other damages such as unpaid wages, unpaid overtime, unpaid meal and rest breaks and interest. Additionally, they expose a company to lawsuits (either PAGA or class action). Determining whether to classify an individual as a contract worker or an employee can be particularly confusing during this time of adjustment to the new regulations. If you have questions about AB 5 and how the classification or misclassification can potentially impact your organization, it may be best to consult with a trusted and knowledgeable CA HR Services expert.
CA HR Services specializes in working with small and medium-sized companies to help develop legal, efficient and appropriate HR processes and procedures that meet state and federal labor law requirements. Contact them today 858-228-5535.