California adopts ABC test for classifying workers as employees
Recent legislation will now force employers to convert most of their independent contractors to employees. The new law is AB 5 (Ch. 19-296) codifies the California Supreme Court's ruling in Dynamex.1
Under AB 5, most workers are presumed to be an employee for purposes of the Labor Code, the Unemployment Insurance Code, and for most wage orders of the Industrial Welfare Commission unless a hiring entity satisfies a three-factor test, referred to as the ABC test.
Under the ABC test, all three of these conditions must be met in order to treat the worker as an independent contractor:
A: 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.
B: The worker performs work that is outside the usual course of the hiring entity's business; and
C: 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 the minimum wage, workers' compensation, unemployment insurance, paid sick leave, overtime, and paid family leave.
While applying the ABC test to workers will result in many more workers being classified as employees, the legislation provides for numerous exemptions to the application of the ABC test. If an exemption applies, then the standard for determining whether a worker is an employee or an independent contractor will continue to be the Borello right-to-control test.
The exemptions discussed later are quite extensive, and already additional bills have been introduced that would further expand on these exemptions. Noticeably absent from any of the exemptions are "App" workers, such as Uber and Lyft drivers. Uber and Lyft have threatened to place a challenge to AB 5's application to their business model by placing the issue as a ballot initiative in an upcoming election.
The bill states that the application of the ABC test is declaratory of existing law with regard to most wage orders of the Industrial Welfare Commission and violations of the Labor Code relating to wage orders.4 The Ninth Circuit has held that the Dynamex ruling is given retroactive effect.5 However, the upcoming described exemptions may also be applied retroactively to existing claims and actions to the extent permitted by law.
Unemployment compensation coverage must be provided starting January 1, 2020.6 Workers' compensation is not required for these newly reclassified employees until July 1, 2020.7
Reclassification to independent contractor prohibited
The bill prohibits employers from reclassifying an individual who was an employee on January 1, 2019, to an independent contractor due to the bill's enactment. So even though a worker may qualify for an exemption, if they were treated as an employee as of January 1, 2019, they may not be reclassified.
Specific occupations exemption
Workers engaged in the following occupations are exempt from the ABC test:8
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); and
Real estate licensees and repossession agents.9
Professional services exemption
The Borello right-to-control test will still apply to contracts for professional services, whether provided by a sole proprietor or other business entity, if specified conditions are met.11
Professional services are defined as:
Administrators of human resources;
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.
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.
Business-to-business contracting exemption
Also exempt from the ABC test standard are business entities (the "business service provider"), including sole proprietorships that contract to provide services to another such business (the "contracting business"), such as when a manufacturing plant hires an efficiency expert.13 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.
Because plumbers, electricians, etc., are required to be licensed, they would not qualify for the business-to-business exemption when a business hires them to come in and perform repairs. However, the exemption really wouldn't be necessary in such cases because these circumstances would likely satisfy the ABC test.
Construction subcontractor exemption
The Borello standard would apply to classifying construction contractor/subcontractor relationships if the contract is in writing and the subcontractor:14
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.
Until January 1, 2022, an exemption also governs construction trucking services. However, for work performed after January 1, 2020, any business entity that provides construction services to a licensed contractor utilizing more than one truck is the employer for all drivers of those trucks.
Referral agency exemption
The Borello test, and not the ABC test, applies in determining the relationship between a service provider and a referral agency if the service provider:15
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.
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;
Minor home repairs;
Motor club exemption
The Borello test will continue to apply to the relationship between a motor club (e.g., AAA) and individuals 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 that is a separate and independent business from the motor club.16
1 Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903
9 Labor Code §2750.3(d)
2 Labor Code §2750.3
10 Labor Code §2750.3(b)(7)
3 S.G. Borello & Sons, Inc. v. Dept. of Ind. Rel. (1989) 48 Cal.3rd 342
11 Labor Code §2750.3(c)
4 Labor Code §2750.3(i)
12 Labor Code §2750.3(c)(xi)
5 Vasquez v. Jan-Pro Franchising International, Inc. (May 2, 2019) U.S. Ct. of Appeals, Ninth Circuit, Case No. 17-16096
13 Labor Code §2750.3(e)
6 UIC §621
14 Labor Code §2750.3(f)
7 Labor Code §3351
15 Labor Code §2750.3(g)
8 Labor Code §2750.3(b)
16 Labor Code §2750.3(h)