A Primer on AB5: For Independent Contractors, Employees, & the People Who Hire Them
AB5 is a new California law which resets the standard for classifying workers as independent contractors instead of employees. There’s been a lot of talk about AB5 among employers, gig workers, freelancers, and Californians in general. Everyone’s concerned about the effects this new law will have. So what is AB5 and how does it affect you?
AB5 codifes a court decision named Dynamex (pronounced “dynamics”) into California law, and attempts to clarify and expand upon it. As many news articles about both the Dynamex case and AB5 highlight, both are designed to stop companies from claiming workers are independent contractors when the law considers them employees.
In order to fully understand the changes, knowing the legal difference between an independent contractor and an employee is key. For the purposes of this article, we’re using “independent contractor” to be any kind of non-employee worker, like a freelancer or other gig worker. Note that California law presumes that a worker is an employee, not an independent contractor, so the burden is on whoever’s doing the hiring to get the correct classification of the worker down right!
A lot of companies like to use independent contractors because they often end up being cheaper for the company, and many workers like the flexibility being a freelancer brings. However, if a company is exerting a lot of control over a contractor’s work, that person is probably considered an employee under the law. This was true even before AB5, and once AB5 becomes law on January 1, 2020, the rules become more stringent. If a company treats someone like a contractor, and a government agency or court determines they are an employee under the law, this is called “misclassification.” Penalties for those who misclassify can be incredibly expensive.
With the passing of AB5 into law, these three factors must be met for someone to be classified as a contractor. These factors are often referred to as “the ABC Test.”
- A. The worker is free from the company’s control and direction in connection with the performance of the work, both under the contract and in fact.
A determines if the hirer is controlling the work the worker is doing. “Under the contract and in fact” points to whether the hiring company actually has the right to control the worker, even if they’re not taking advantage of that right. Control = employment under part A.
- B. The worker performs work that is outside the usual course of the company’s business.
Part B explains that if the work done by the worker is routine and necessary to the usual course of a company’s business, the worker is considered an employee. An example: a worker doing administrative work like answering phones and opening mail would be considered an employee because the tasks are necessary and a part of the normal course of business. However, if a plumber comes to a marketing office to fix the sink, the work the plumber is doing is not within the normal tasks that company performs, and hey are clearly not an employee of that office.
- C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
C basically means that a contractor should have their own business in which they regularly do the work they’re doing for the company that hired them. Having other clients, independent marketing materials for their business, business insurance, and their own employees help demonstrate that the contractor has their own business and therefore works for themselves. If they don’t have their own business setup, they will appear to be an employee.
Are there gig economy worker exceptions to AB5? Well, yes, there are. Plus, there are a whole lot of workers hoping to add their industries to the list (truckers, dancers, and musicians, to name a few). Unless you’re a California employment lawyer yourself, you probably want to check with us or another attorney to determine whether the worker you engage under one of the following exceptions is really considered an exception in the eyes of California law. Some of these exceptions have additional requirements (*), and, again, the penalties for misclassification can be expensive. Please don’t think these exceptions mean you can classify anyone the way you want! As mentioned before, whether or not a worker is under the hiring company’s control is a huge factor in deciding whether or not a worker is an employee or an independent contractor.
- Insurance agent, broker, analyst, etc., licensed by the Department of Insurance.
- Physician, surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the state of California.
- Lawyer, architect, engineer, private investigator, accountant licensed by the state of California.
- Securities broker-dealer or investment adviser registered with the SEC or FIRA or the state of California.
- Direct salesperson*.
- Commercial fisherman.
- Newspaper distributor or carrier.
- Licensed estheticians, electrologists, manicurists, barters, or cosmetologists (with extra criteria).
- Real estate licensee, or repossession agency.
- Construction subcontractors, or construction trucking services*.
- Referral agencies 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 services.
- Motor clubs.
- Professional services contracts for marketing, human resources administrator, travel agent, graphic designer, grant writer, fine artist, enrolled agent, payment processor, photographer/photojournalist, freelance writer/editor/newspaper cartoonist.*
- Business to business contracts, if there is a “bona fide business-to-business contracting relationship.”*
Please remember that the Dynamex decision is still fairly new, and AB5 is even newer, so more court cases will decide the particulars. Make sure you’re following the letter and spirit of the existing older laws as well as the new ones, and you’ll be fine. And we’ll keep posting more information about changes to the law and how they affect you here on our website.
Still confused? Join our free webinar on December 11th & get all the info you need to know.