California AB 5

On September 18, 2019, California Governor Gavin Newsom, signed Assembly Bill 5 (“AB 5”) into law. AB 5 is a state statute that expands on Dynamex Operations West, Inc. v. The Superior Court of Los Angeles and went into effect January 1, 2020. AB 5 adds Section 2750.3 to the California Labor Code to codify the “ABC Test” to determine whether a worker is an independent contractor or an employee. The ABC Test presumes that a worker is an employee, unless, the hiring party establishes the following conditions:

The person is free from the control and direction of the hiring party in connection with the performance of the work, both under the contract for the performance of the work and in fact;
The person performs work that is outside the usual course of the hiring party’s business; and
The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

It is important to note that the hiring party carries the burden of proving, both clearer and stricter than which is required by federal guidelines, all three conditions and thus the worker is an independent contractor versus the presumed employee.

Exemptions

Section 2750.3 exempts certain workers and situations from the ABC Test, and subjects those workers and situations to the common law test articulated in S. G. Borello & Sons, Inc. v. Department of Industrial Relations. The Borello test evaluated multiple factors (primarily whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired), but did not dictate that all factors must be established in order to classify the worker as an independent contractor. These exemptions fall under three main categories: exempt occupations, professional services exemptions, and business-to-business exemptions.

Exempt Occupations

As a non-exhaustive list, licensed professionals such as doctors, dentists, psychologists, lawyers, architects, veterinarians, engineers, investigators, accountants, real estate brokers, and other professions such as commercial fisherman, direct salespeople, and workers performing repossession services are examples of occupations that are exempt from the ABC Test and are tested under Borello.

Professional Services Exemptions

In addition to listing certain occupations as exempt from the ABC Test, AB5 states that businesses that provide professional services such as in marketing, human resources administration, graphic design, grant writers, services provided by an enrolled agent who is licensed by the U.S. Department of the Treasury, payment processing agent(s) through an independent sales organization, some still photographers or photojournalists, services provided by a freelance writer, editor, or newspaper cartoonist, services provided by a licensed esthetician, electrologist, manicurist, barber, or cosmetologist are examples that would qualify as exempt from the ABC Test and are tested under Borello.

Further, all of the following factors must be met in order to qualify under a “professional services exemption:”

The individual maintains a business location that is separate from the hiring entity
The individual has a business license in addition to any professional licenses or permits (if applicable or required)
The individual has the ability to set or negotiate their own rates for the services performed
The individual may set their own hours (outside of project completion dates and reasonable business hours)
The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other customers as available to perform the same work and
The individual customarily and regularly exercises discretion and independent judgement in the performance of the services.

Business-to-Business Exemptions (Applies to a business entity rather than individual(s))

Finally, AB5 lays out an exemption from the ABC Test for a business-to-business contracting relationship if the contracting business can demonstrate all of the following:

The business service provider is free from the control and direction of the contracting business
The business service provider is providing services directly to the contracting business (rather than to the contracting business’s customers)
The business service contract is in writing
If the work is performed in an area that requires the business service provider to have a business license or tax registration, the business service provider has the required business license or tax registration
The business service provider maintains a business location that is separate from the business or work location of the contracting business
The business service provider is customarily engaged in an independently established business of the same nature
The business service provider actually contracts with other businesses to provide the same or similar services
The business service provider advertises and holds itself out to the public as available to provide the same or similar services
The business service provider provides its own tools, vehicles, and equipment
The business service provider negotiates its own rates
The business service provider sets its own hours and work location and
The business service provider is not performing the type of work for which a license from the applicable state license board is required

Further Amendment to AB5

On September 4, 2020, Governor Newsom signed an amendment to AB5 into law, effective immediately (AB 2257). The effect of this amendment was to make more jobs and professions exempt from the ABC Test, which went into effect January 1, 2020. The primary areas impacted by this amendment are freelance writers, musicians, film crews, and visual artists. As a reminder, if a professional, occupation, or business-to-business relationship falls under an exemption, it is subject to the less stringent Borello test instead of the ABC Test.

Exempt Occupations

The September 2020 amendment to AB5 now includes occupations such as recording artists, songwriters, lyricists, composers, proofers, musical engineers, musicians or musical groups (for the purpose of a single engagement live performance), individual performance artists, freelance translators, real estate appraisers, home inspectors, manufactured housing salesperson, and competition judges with a specialized skill set are among the many occupations now exempt from the ABC Test and are subject to Borello.

Professional Services Exemptions

Further, the September 2020 amendment to AB5 now includes certain freelance writers, photographers and the like and removes the caveat that in order to qualify under this exemption, the freelancer must not have more than thirty-five (35) submissions a year, meaning that it does not matter how many submissions a freelancer (qualified under this exemption) has with one particular hiring entity. Subject to certain provisions, the amendment also qualifies more professions under this exemption, such as translators, content contributors, advisors, narrators, and cartographers. Furthermore, the amendment adds the requirement that the freelancer (i) provide services under a contract that lays out in advance certain factors such as pay and intellectual property rights, and that the individual may not take the place of an employee performing the same work in the same volume and (ii) must not perform the work primarily at the hiring entity’s business location and cannot be restricted from working with other hiring entities.

Moving forward, it is increasingly important that business entities continue to carefully assess agreements to determine whether the individual falls within AB5, the amendment to AB5, and the highly contested nature of worker classification. Business entities should also continue to monitor for future AB5 amendments and other changes in the law with respect to worker classification and or status.