Management: Understanding California’s New Independent Contractor Law
Assembly Bill 5 (AB5), which addresses employee classification, became law in California on January 1, 2020. This law implements a new test for employers to use to determine if a worker is an independent contractor for the purposes of the Labor Code, Unemployment Insurance Code and the Industrial Welfare Commission (IWC) wage orders. The law also applies to Workers’ Comp coverage as of July 1, 2020.
AB5 sets a new “ABC Test” for determining a worker’s independent contractor status, which is intended to be easier and more predictable for employers and workers. Under the new law, a worker is considered an “employee” unless they meet all three conditions to be classified as an independent contractor. The three conditions are:
The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
While most employers and their workers will need to meet these conditions, there are a few exceptions that would need to follow the multifactor Borello test, including:
- When the Legislature or IWC has defined an employment relationship in a certain way;
- When a court determines the ABC test cannot be applied; or if the occupation or contracting relationship is specifically exempted
More information on the ABC and Borello tests, exemptions and requirements under AB5 are available on the State of California’s Department of Industrial Relations site at www.dir.ca.gov/dlse/FAQ_IndependentContractor.htm.
California-based companies should take these actions:
- Determine which workers are now classified as independent contractors.
- Review the list of exemptions to determine if you must apply the ABC test or the Borello test.
- Examine carefully each worker’s actual job duties, expectations, control, supervision, etc. applying the applicable test.
- If applying the ABC test, be sure workers meet all three conditions to be classified as an independent contractor.
- If you need to reclassify a worker from an independent contractor to an employee, be sure to update your records, get the employee on your W-2 payroll, and be sure the employee is covered by unemployment and Workers’ Comp as well as other state benefits.
- If there is a question about the worker’s classification, it is best to default to “employee” as it is usually more beneficial for the individual.
This article is for general informational purposes only; it is not legal advice and should not be relied upon as such. Each reader is encouraged to consult independent legal counsel before making any decisions concerning the matters in this communication.
Claudia St. John, SPHR, SHRM-SCP is president of Affinity HR Group. Paige McAllister, SPHR, SHRM-SCP is vice president, HR compliance at Affinity HR Group, PPAI’s affiliated human resources partner, specializing in providing human resources assistance to associations, including PPAI and its member companies. www.affinityHRgroup.com.
PPAI Online Education
In February, the authors covered this topic in PPAI’s 60-minute webinar, California’s New Independent Contractor Rules. It covered the basic assumptions of the new law as well as the implications of re-classifying employees/independent contractors. The webinar is available for download at https://onlineeducation.ppai.org/products/californias-new-independent-contractor-rules.
Claudia St. John and Paige McAllister provided answers to these questions and others during the live presentation of PPAI’s webinar, California’s New Independent Contractor Rules. They also recommended consulting a labor attorney to better understand the rules, exemptions and to discuss specific situations.
What if the company doesn’t sell but the sales are made by independent contractor sales reps?
If a company is making something that must get to somebody, the purpose of the company is to sell the products, not keep them in a warehouse. How do you distribute? Through sales. So even if the company itself has no salespeople on the books, it doesn’t mean that the company isn’t set up for sales. Look at it this way: if you didn’t have salespeople, would your business survive? If the answer is no, I would assume the salesperson would be classified as an employee.
If a salesperson has their own business with their own tax ID and sells for a company, do they fall under this new law?
If they have their own tax ID, infrastructure, computer and systems, the person would probably meet the C condition on the ABC test. That helps but they are still not independent because you have to go back to A and B on the test: how much control does the company have over the worker and is the worker performing work outside the usual course of business? Under the multi-factor Borello test, you don’t have to meet all of them, so that’s a check box on the independent contractor side. But when you’re talking about the overall relationship, look at how permanent is it? How much direction is there? Is it part of the business? Just because you have a tax ID number doesn’t make you an independent contractor. You still have to meet all of the requirements.
If the company is in California but the sales are done in Florida, does this law apply and conversely, if the company is in Florida but sales are done through reps in California, is it only the reps in California who need to be employees?
This law applies to California employees. If the company is based in Florida but has employees who work in California, it applies to them but not to salespeople in Florida or anywhere else. If the company is based in California and has employees in Florida, it’s not going to apply to the Florida employees, but it will to those in California. Also, employment law refers to where the employee is working, not where the employee lives. For example, if the employee lives in Oregon and commutes to California to work, it applies there—even if the employee works in California only part of the time.
- State of California Department of Industrial Relations: www.dir.ca.gov/dlse/faq_independentcontractor.htm
- CalChamber: www.calchamber.com/california-labor-law/independent-contractor