AB5: What You Need to Know About California's
New Independent Contractor Laws
California was already one of the most restrictive in the country when it came to hiring independent contractors, but as of January 1, 2020, the new law, Assembly Bill 5, went into effect, changing 30-year-old rules about independent contractors.
What Employers Need to Know About Hiring Independent Contractors
If you employ independent contractors in California, it is very important you understand this new law, as it almost certainly affects you. The previous law established a multi-prong test that offered more nuances and special circumstances. Under the new AB5 “ABC Test,” anyone you classified as an independent contractor unless you can establish all three of the following:
A) The worker is free from control and direction. This means that the worker has to have complete freedom in how, when, and where he or she does the work, and the hiring party or entity cannot control them either in writing or in reality. This means just because you create an agreement that says they are free from control, if in practice they are not, then this prong is not met.
B) The worker performs work that is outside the usual course of business. This is pretty much the biggest hurdle that employers are now unable to overcome. What does this mean? Basically, if you are a social media manager and you hire a VA to do social media engagement for your clients, that is within the “ordinary course of business” and therefore, not eligible to be an independent contractor. An example of something outside the ordinary course of business? A fitness coach hiring an email marketing company to create a sales funnel or a website design firm engaging business coach to help them push through limiting beliefs.
C) The worker is engaged in an independently established trade, occupation, or business that is similar to that of the hiring entity. This means that the person is running their own business, usually has an entity and/or FEIN (as opposed to working as an individual under their SSN) and performs the same type of work for other companies and/or clients.
Are There Exemptions to AB5?
The good news is, there are some exemptions that have already been carved out, although they are guaranteed just by virtue of the industry. They are just more likely to be exempt and get to use the historical multi-prong test to determine whether they meet the independent contractor rules. Who are these lucky exemptions?
- Licensed Professionals: Doctors, Lawyers, Architects, Engineers
- Financial Services Providers: Insurance Brokers, Accountants, Investment Advisors, Securities Broker-Dealers
- Real Estate Agents
- Direct Sales/Network Marketing: The key here is they only fall into an exemption if compensation is based on actual sales rather than wholesale purchases or referrals
- Commercial Fisherman: Only exempt until 2023
- Professional Services: Marketing, HR Administrator, Travel Agents, Graphic Designers, Grant Writers, Fine Artist, Etc.
- Freelance Writers/Photographers: No more than 35 submissions to an outlet per year
- Hairstylists: Must be a licensed barber or cosmetologist that sets own rates and schedule
- Estheticians, Manicurists: Must be licensed
- Tutors: Must teach own curriculum—does not apply to public school tutors
How Do You Know If Your Independent Contractor is Exempt?
If you think your worker may qualify for an exemption under AB5, you need to look to the old test, known as the Borello Test, which includes 11 factors to consider, but the first and biggest hurdle is about control over the worker. The other factors include:
- Whether the worker is engaged in an occupation or business that is different from the hiring firm. (Outside of the question of control, this is the factor that is given the most weight.)
- Whether the work is part of the employer’s regular business.
- Whether the employer supplies tools, equipment, office, etc.
- The worker’s financial investment in the equipment and materials required to perform the work.
- The skill required for the particular occupation—the higher the skill level, the more likely it will support an independent contract relationship.
- The kind of occupation—is this typically done under a hiring firm’s direction or by a specialist who doesn’t have to be supervised?
- Opportunity for profit or loss depending on the worker’s own managerial skill.
- How long are the services to be performed?
- What is the degree of permanence of the working relationship? Is it project-based? Ongoing?
- Payment method—is it by time? The project as a whole?
- Intent of relationship. Did the parties believe they were creating an employer/employee relationship?
Licensed professionals noted above only have to consider the Borello Test factors. However, professional service providers, such as graphic designers, marketing professionals, and grant writers, need to satisfy the following 6 additional factors:
- Maintain a business location separate from hiring firm (home office is okay).
- Have a business license, in addition to any required professional licenses. (This one’s tricky as not all cities/counties require business licenses for all businesses, but if required, they must have one.)
- Must be able to set or negotiate rates. (Be sure to document the rate negotiation wherever possible.)
- Must be able to set their own hours.
- Regularly does the same work under contract for other firms or hold themselves out to other potential customers as available to perform the same type of work. (i.e. do they have a website, business card, and legitimate business where they do or offer the same type of work to other clients?)
- Regularly exercise discretion and independent judgment in performing their services.
Not Sure Where Your Business Lands?
That’s okay—these tests are confusing and will continue to be shaped as cases hit the courts and exceptions, exemptions, and clarifications are carved out.
Let’s chat today about your independent contractors and whether you need to convert them into employees or if they fit within allowed exemptions.