California Assembly Bill Five Excepts Certain Categories Of Workers From Independent Contractor Classification Overhaul

AB 5 is a new California law related to an issue that is critically important to California employers and service providers—whether a worker is classified as an employee or an independent contractor. Much of the commentary surrounding AB 5 to date has focused on its effect on app-based gig-economy businesses like Uber, Lyft, and Postmates, however, AB 5’s reach will undoubtedly require all types of employers and service providers to carefully consider the circumstances under which they rely on independent contract classifications to operate their businesses and provide services to clients.  Indeed, AB 5 may be just one of many new laws aimed at fundamentally changing California’s workforce.  In his signing statement, Governor Gavin Newsome indicated that his goal is to “creat[e] pathways for more workers to form a union, collectively bargain to earn more, and have a stronger voice at work—all while preserving flexibility and innovation.”

AB 5, which is set to go into effect on January 1, 2020, codifies the California Supreme Court’s 2018 decision in Dynamex Operations West v. Superior Court which held that an individual is presumed to be an employee unless the employer can satisfy the so-called “ABC Test.” You can read our previous article, here, discussing the Dynamex decision and the ABC Test which requires employers to show that the worker (A) is free from the employer’s control, (B) performs work outside the employer’s usual business, and (C) is customarily engaged in the trade she is hired to do independent of the employer’s business.

Indeed, AB 5 may be more noteworthy for who it excepts from the Dynamex ABC Test, including workers involved in (1) professional services, (2) specific occupations, (3) business-to-business contracts for services, (4) the construction industry, and (5) referral agencies. For these exceptions, the statute specifies that the test established by the California Supreme Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, rather than the ABC Test, will apply to determine whether a worker is an employee or independent contractor. An overview of the Borello test and the criteria for each of the five exceptions are below.

The Borello Test.   Unlike the ABC Test, which presumes a worker is an employee unless three requirements are met, the Borello test contains no such presumption and instead involves weighing ten different factors to determine whether an individual is an employee or independent contractor. The principal factor of the Borello test is whether the employer has the right to control the manner and means of work. Other factors include the right to discharge, the skill and supervision involved, and the length of time for which the services are performed. While Borello can appear less rigorous than the ABC Test and more likely to result in an independent contractor classification, that is not always the case. Indeed, where an employer has the right to control the manner and means of work for a particular worker, that worker may well be classified as an employee under both tests.

Professional Services.  Under AB 5, an individual or business entity may receive “professional services” from an individual, but classify the worker under Borello rather than the ABC Test if certain criteria are met. Importantly, only certain “professional services” fall within this exception, including graphic design, marketing, photography or photojournalism, human resources administration, travel agent services, fine art, payment processing, freelance writing or editing, and certain beauty services.

Specific Occupations.  AB 5 also provides that the Borello test will apply to certain specific occupations, provided they are licensed by the State of California, including architects, engineers, doctors, dentists, veterinarians, lawyers, private investigators, accountants, insurance professionals, stockbrokers, and investment advisers. Salespersons are also excepted from the ambit of the ABC test provided that their compensation is based on actual sales (rather than the number of hours worked).

Business-to-Business Contracts for Services.  AB 5 creates an additional exception to allow a business (the “contracting business”) to contract to receive services from workers employed by another business (“business service provider”), without those workers being subject to the ABC Test. To fall within the exception, the contracting business must satisfy twelve criteria enumerated in the statute. However, many of the criteria could be difficult for a contracting business to verify to ensure its compliance with the exception, including whether the business service provider has a business license and has contracts with other businesses to provide the same or similar services.

Construction Industry.  AB 5 provides that Borello will likewise govern the relationship between a contractor and an individual performing construction work pursuant to a subcontract if eight criteria, many of which are similar to the criteria for the other exceptions, are met.

Referral Agencies.   Lastly, AB 5 provides that the relationship between a referral agency and the service providers it places with clients be governed by Borello under certain conditions. First, this exception only applies to referral agencies that connect service providers that provide graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal care, dog walking, dog grooming, web design, picture hanging, pool cleaning, or yard cleanup services. The referral agency must also meet ten requirements, including that the service provider maintains a clientele without restrictions from the referral agency and is free to seek work elsewhere.

In closing, the AB 5 exceptions were a hotly debated component of the bill and many industries that lobbied the legislature were not granted an exception, so future amendments or litigation may revise or clarify to whom and when they apply. Moreover, as Uber’s recent announcement that the passage of AB 5 does not compel it to reclassify the drivers who connect with riders on its platform, we will be entering a period of uncertainty as California courts begin to define when an independent contractor’s work is really inside or outside the business of the companies that engage them. In addition, when reviewing working relationships in light of the new law, employers and service providers alike need to remember that the AB 5 exceptions described above do not automatically settle the question of independent contractor status. Just because a particular worker appears to fit the criteria of one of AB 5’s exceptions does not automatically mean that the worker is an independent contractor—the circumstances of his or her work must still satisfy Borello.

For further information on determining whether workers in California should be classified as employees or independent contractors or assistance in reviewing your employee agreements for compliance, contact Coblentz Employment lawyers Fred Alvarez, Stephen Lanctot, Katharine Van Dusen, Kenneth Nabity, and Hannah Jones.