Law Review: AB 5 nightmare: independent contractor or employee?
For hundreds of years, hundreds of thousands of employers in California have hired some workers as independent contractors, without withholding, using 1099 forms.
It’s been a convenient way to do business, considerably less expensive than treating everyone you hire as a full-blown employee with obligations to pay workers compensation, disability, overtime, meal periods, rest breaks, etc.
All of that changed as of January 1, 2020.
BORELLO TEST VS. DYNAMEX ABC TEST
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For nearly 30 years, California courts, the California Labor Commissioner’s office and employers have used the so-called Borello test to determine if a worker should be classified as an employee or an independent contractor. The Borello test has 11 factors primarily focusing on whether the employer has control over the means and manner of performance. Also, who provides work tools, does the worker have a business, what are the worker’s opportunities for profit or loss, and more.
In the Dynamex case, the California Supreme Court revisited the Borello 11-factor analysis and ruled that Borello is no longer the proper test; the so-called ABC test should be used. Following Dynamex, the California Legislature adopted Assembly Bill 5 which fleshed out the Dynamex ABC test. You need to be familiar with the ABC test.
A worker is presumed to be an employee and not an independent contractor unless the employer proves that the worker is free from the control and direction of the company in performing work and not under the company’s control. That’s A.
Part B of the test requires the worker to “perform work that is outside the usual course of the hiring entity’s business.” This is the killer for most of you who hire 1099 workers. For example, if you are a health-care professional (or marriage counselor or exercise studio), you can’t hire anyone to provide those same services, even on a short-term basis, without making him or her your employee. No 1099s if the worker provides the same services as the employer.
Part C of the test requires the work to be “customarily engaged in an independently established trade, occupation, or business of the same nature as the work preformed by the hiring entity.” Not good for Uber and Lyft.
AB 5-EXEMPTED BUSINESSES
Certain businesses are expressly listed in AB 5 as exempt from the new ABC test (which means you fall back on the Bordello test to determine if the hires are employees or independent contractors). These exempt occupations include the following: doctors of all kind, professionals like lawyers (surprise, surprise), architects and engineers, marketing services, HR administrators, travel agents, graphic designers, grant writers, accountants, securities broker-dealers, investment advisors, insurance brokers, real estate agents, direct sales, builders and contractors, freelance writers and photographers (contributing no more than 35 submissions to an outlet in a year), hair stylists and barbers, licensed estheticians and manicurists, and a few more.
Don’t ask me how our Legislature came up with that list.
By the way, AB 5 has no grace period. It’s effective for employees or independent contractors whether hired before or after Jan. 1, 2020. Fortunately, that is being reviewed by the California Supreme Court.
It’s hard to say what you should do as an employer other than do your best to comply with this new law, which surely will be tuned up in the next Legislative session. Several industries have challenged AB 5 as to their businesses. The trucking industry obtained a temporary restraining order prohibiting enforcement.
I’m always reluctant to write the Law Review as a pitch for new clients, but if after reading AB 5 you have questions about some of your hires, confer with an attorney. The penalties for misclassifying workers are significant. Read our informative blog at PorterSimon.com.
Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee and Tahoe City, California, and Reno, Nevada. Jim’s practice areas include: real estate, development, construction, business, HOA’s, contracts, personal injury, accidents, mediation and other transactional matters. He may be reached at firstname.lastname@example.org or http://www.portersimon.com.
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