Current Events
AB5 (California Supreme Court’s Dynamex Ruling)
California adopts ABC test for classifying workers:AB 5 codifies and expands upon the California Supreme Court’s Dynamex ruling, in which the court adopted the ABC test for determining whether a worker is an employee or an independent contractor for purposes of California wages.
Under AB 5, most workers are presumed to be an employee. Under the ABC Test, all three (3) conditions of the test must be met in order to treat the worker as an independent contractor.
Three Conditions:
The worker 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
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
This means that employers must ensure that these newly covered workers receive at least:
Minimum wage;
Required meal and break times;
Workers’ compensation;
Unemployment insurance;
Paid sick leave;
Overtime pay; and
Paid family leave.
Exemptions to the ABC Test: Specific Occupations:
Workers engaged in the following occupations are exempt from AB 5’s ABC test and should use the Borello-test guidelines:
Licensed insurance brokers;
Licensed physicians and surgeons, dentists, podiatrists, psychologists, and veterinarians;
provided that the workers are not covered by a collective bargaining agreement;
Licensed lawyers, architects, engineers, private investigators, and accountants;
Registered securities broker-dealers, investment advisors, or their agents and advisors;
A direct salesperson as defined under UIC §650 (essentially a person who performs in-person
demonstrations and sales presentations of consumer products);
Until January 1, 2023, commercial fishermen (with certain exceptions under UIC §609);
Real estate licensees and repossession agents (Labor Code §2750.3(d)); and
Until January 1, 2021, newspaper distributors working under contract with a newspaper publisher and newspaper carriers working under contract either with a newspaper publisher or newspaper distributor.
Exemptions to the ABC Test: Professional Services:
Workers engaged in the following occupations are exempt from AB 5’s ABC test and should use the Borello-test guidelines:
Professional services are defined as:
Enrolled agents;
Marketing services;
Administrators of human resources;
Travel agents;
Graphic designers;
Grant writers;
Fine artists;
Payment processing agents through an independent sales organization;
Still photographers or photojournalists (this clause is not applicable to individuals who work on “motion pictures,” which includes television, internet streaming theater, commercials, broadcast news, music videos, and live shows); and
Freelance writers, editors, or newspaper cartoonists.
(Labor Code §2750.3(b)(7))
To qualify for the professional services exemption, the individual must:
Maintain a business location (which may include the individual’s residence) that is separate from the hiring entity. However, nothing prevents an individual from choosing to perform services at the location of the hiring entity;
Obtain any required business and or professional license if work is performed on or after July 1, 2020;
Have the ability to set or negotiate their own rates for services performed and to schedule their own hours outside of project completion dates and reasonable business hours;
Be customarily engaged in the same type of work performed under contract with another hiring entity or hold themselves out to other potential customers for the same work; and
Customarily and regularly exercise discretion and independent judgment in the performance of the services.
Exemptions to the ABC Test: Various Salon Workers:
Estheticians;
Electrologists;
Barbers;
Cosmetologists; and,
Until January 1, 2022, manicurists.
To qualify for the exemption, the worker must:
Set their own rates, process their own payments, and be paid directly by clients;
Set their own hours and have sole discretion over the number of clients and which clients they will see;
Have their own book of business and schedule their own appointments;
Maintain their own business license; and
Issue a Form 1099 to the salon or business owner if the worker rents a space from the owner.
Exemptions to the ABC Test: Business-To-Business Contracting:
The business service provider does work for another business entity.
In order to qualify for the exemption, the contract must be in writing, and the business service provider must:
Be free from the control and direction of the contracting business entity, both under the contract for the performance of the work and in fact;
Provide services to the contracting business rather than to customers of the contracting business;
Have a required business license or tax registration if the work is performed in a jurisdiction that requires such;
Maintain a business location that is separate from the business or work location of the contracting business;
Be customarily engaged in an independently established business of the same nature as that involved in the work performed, contract with other businesses to provide the same or similar services, and maintain a clientele without restrictions from the hiring entity;
Advertise and hold itself out to the public as available to provide the same or similar services;
Provide its own tools, vehicles, and equipment to perform the services;
Negotiate its own rates and set its own hours and location of work; and
Not be performing the type of work for which a license from the Contractors State License
Board (CSLB) is required, pursuant to B&PC §7000 et seq.
Exemptions to the ABC Test: Construction Subcontractor:
The Borello standard would apply to classifying construction contractor/subcontractor relationships if the contract is in writing and the subcontractor:
Is free from the control and direction of the contractor in connection with the performance of the work, both under the contract for the performance of the work and in fact;
Is licensed by the California Contractors State License Board, and the work is within the scope of that license;
Has a local business license or business tax registration if the subcontractor is domiciled in a jurisdiction that requires a license/registration;
Maintains a business location that is separate from the business or work location of the contractor;
Has the authority to hire and to fire other persons to provide or to assist in providing the services;
Assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided; and
Is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(Labor Code §2750.3(f))
Unlicensed subcontractors Under existing California law, if a contractor engages the services of any subcontractor or construction worker who does not have a valid license issued by the Contractors State License Board (CSLB), the worker is considered to be an employee, and the contractor is liable for all California payroll taxes. (UIC §§621.5, 13004.5)
Exemptions to the ABC Test: Referral AgencyThe Borello test, and not the ABC test, applies in determining the relationship between a service provider and a referral agency if the service provider:
Has formed a business entity as a sole proprietor, partnership, LLC, limited liability partnership, or corporation;
Is free from the control and direction of the referral agency as a matter of contract and fact;
Has all required state or local business licenses/registrations;
Delivers services to the client under the service provider’s name, rather than under the name of the referral agency;
Provides its own tools and supplies to perform the services;
Is customarily engaged in an independently established business of the same nature as that involved in the work performed for the client;
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;
Sets its own hours and terms of work and is free to accept or reject clients and contracts;
Sets its own rates for services performed, without deduction by the referral agency; and
Is not penalized in any form for rejecting clients or contracts, unless the service provider accepts a client or contract and then fails to fulfill any of its contractual obligations. (Labor Code §2750.3(g))
A referral agency is a business that connects clients with service providers that provide the following services:
Animal services related to daytime and nighttime pet care;
Dog walking and grooming;
Errands;
Event planning;
Furniture assembly;
Graphic design;
Home cleaning;
Minor home repairs;
Moving;
Photography;
Picture hanging
Pool Cleaning
Tutoring; and
Yard cleanup.
To Sum up: the exemptions to the ABC Test:
If an exemption applies, then the standard for determining whether a worker is an employee, or an independent contractor will be the Borello-type tests.
The principal factor of these tests is whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired. If the principal has the right to control the services performed by the worker, whether or not that right is exercised, an employer-employee relationship exists.
Factors to be examined:
Whether the one performing the services is engaged in a separately established occupation or business;
The kind of occupation, with reference to whether, in the locality, the work is done under the direction of a principal without supervision;
The skill required in performing the services and accomplishing the desired result;
Whether the principal or the person providing the services supplies the instrumentalities, tools, and the place of work for the person doing the work;
The length of time for which the services are performed to determine whether the performance is an isolated event or continuous in nature;
The method of payment, whether by the time, a piece rate, or by the job;
Whether or not the work is part of the regular business of the principal, or whether the work is not within the regular business of the principal;
Whether or not the parties believe they are creating the relationship of employer and employee;
The extent of actual control exercised by the principal over the manner and means of performing the services; and
Whether the principal is or is not engaged in a business enterprise or whether the services being performed are for the benefit or convenience of the principal as an individual.
The factors weigh differently depending on the facts and circumstances of the case at hand.
The difference between Borello and the ABC test is that in Borello, the factors are weighted and not all factors must be met in order for a worker to be an independent contractor, while under the ABC test, unless a worker meets one of the exceptions, all three factors must be met or the worker is an employee.
If Exempt from the ABC Test due to an exemption, one of these Borello-type tests (Common Law Factors) are considered:
The Independent Contractor Worksheet is linked and may be used as a guide.
However, our office will not give legal advice as to the classification of workers. If you have any questions regarding the classification of employees versus independent contractors, then we strongly encourage you to consult with legal counsel experienced in employment practice matters.
The ramifications of misclassification are severe.
The EDD is aggressive when it comes to payroll tax audits and California does not offer relief from penalties or have a voluntary classification settlement program. If the EDD finds the workers are employees, the business will be assessed significant tax, penalties, interest and any unpaid withholding and/or payroll tax.
In addition, California law allows the Labor Commissioner or a court to assess a civil penalty for “willful misclassification” of employees as independent contractors. The penalty, which is in addition to other assessments, penalties, or fines, is:
$5,000 to $15,000 for each violation (a single misclassified individual); and
$10,000 to $25,000 for each violation if the Labor Commissioner, or a court, determines there is a “pattern and practice” of these violations.