AB5 for HOAs by Galia Schmidt
AB5, and its recent amendment AB2257, 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 law will have. So what is AB5 and how does it affect you?
AB5 codifies 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, associations, and individuals from claiming workers are independent contractors when the law considers them employees.
AB5 doesn’t just apply to companies. It applies to any person or group who is hiring a worker. That means that, big or small, an association who hires workers may be on the hook for this issue, regardless of whether your association is incorporated or has other employees on staff.
In order to fully understand the changes brought by AB5, 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, including 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 and associations like to use independent contractors because they often end up being cheaper for the company, and many workers like the flexibility that comes with being a freelancer. However, if an association 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 became law on January 1, 2020, the rules became even more stringent. If an association 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, all three of these factors must be met for someone to be correctly 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.
Factor A looks at how much control the association has over the worker. “Under the contract and in fact” asks whether the hiring association has the right to control the worker, even if they’re not taking advantage of that right. To decide whether there’s control, the government would look at all the facts at once, such as whether the association tells the worker when to work, provides them the tools to do it, and instructs them on how they want the work to be done. Under this factor, if there’s control, there’s an employment relationship.
- B. The worker performs work that is outside the usual course of the company’s business.
Factor B explains that if the work done by the worker is routine and necessary to the usual course of the association’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. What is considered the “usual course of business” for your association will depend on the size of your association and the services and amenities it provides.
- C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Factor C basically means that a contractor should ideally have their own business in which they regularly do the work they’re doing for the association 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 and/or they aren’t routinely doing the same work for others that they do for the association, they will appear to be an employee.
There are a long list of exceptions to this rule, but before you breathe a sigh of relief, remember that even if an exception exists, it merely means that the previous rule, called Borello, applies. Like Factor A of the ABC Test, Borello revolves around the amount of control the association has over the worker, and also assumes that the worker is an employee unless proven otherwise. Needless to say, it is still a difficult test to overcome.
The exemption most likely to apply to associations is the Business to Business exemption. The B2B exemption has 12 of its own requirements! The key ones include:
- -There must be a written contract between the association and the worker.
- -The worker is providing services to the association and not its “customers,” unless the employees of the contracting business are explicitly working under the name of the contracting business, and they do the same work for other businesses.
- -The contracting business is available to provide the same or similar services to others.
- -The contracting business provides its own tools, sets its own hours, and can negotiate its rate.
- -The contracting business has a business license, and has its own business location separate from the site of the association.
As you can see, the rules and the exemptions are complex, and applying them is fact-based. It all depends on your association, and the relationship it has with the worker. The Dynamex decision is still fairly new, and AB5 is even newer, so more court cases will decide the particulars.
Penalties for misclassification can be financially painful and alarming. And, in my opinion, the risk of getting penalized for misclassification has only gone up since COVID-19 hit the economy. Checking with an expert could save you tens of thousands of dollars down the line, not to mention a great deal of time and stress.
The attorneys at Aharoni Business Law are available to answer your questions about independent contractor classification, AB5, and how it might apply to your association. Watch our webinar about AB5 for more information, or book a meeting with one of our attorneys.