California’s Law Setting New Standards For Independent Contractor Classification Goes Into Effect January 1
In September 2019, the California Legislature passed legislation affecting worker status for employees and independent contractors. California Assembly Bill Number 5 (“AB 5”) codifies a three-part test to determine whether a worker is an employee or an independent contractor under California law. This new law was signed by California’s governor in September and goes into effect on January 1, 2020.
The law’s three-part test includes:
- Part 1 requires the worker to be free from the control and direction of the hiring organization in connection with the work. This condition must exist both under the contract for the performance of the work and in fact.
- Part 2 requires that the person perform work that is outside the usual course of the hiring entity’s business.
- Part 3 requires that the person be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
If any part is missing, and if no statutory exception applies, then, per the express terms of AB 5, the worker must be considered an employee rather than an independent contractor.
If a court finds that the three-part test cannot be applied on grounds other than express exception, the determination of employee or independent contractor status shall be governed by the California Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989) (“Borello”). Under Borello, the primary factor is whether the worker has the right to control the manner and means of accomplishing the result desired. However, Borello and later judicial opinions have identified numerous factors that may be considered in the analysis, none of which are to be applied mechanically or in isolation.
AB 5 has numerous exceptions for some workers and circumstances. The occupations that are exempt include attorneys, engineers, architects, doctors, direct sales salespersons and others; provided, however, the worker must meet the Borello test for qualifying as an independent contractor (discussed above).
Also, if a worker does not qualify for one of the occupation exceptions, the worker may qualify as a professional services contractor, another exception from the three-part test. AB 5 lists several criteria for an individual to qualify for the professional services exception. Like the three-part test, the professional services exception cannot apply unless all six statutory criteria are met. The criteria includes: the person maintains a business location separate from the hiring entity, the person has a business license plus any required professional license or permit to practice their profession, the person is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work, and three other required conditions.
Workers formerly classified as independent contractors may, if they are, indeed, employees under the AB 5 analysis, be eligible for workers’ compensation coverage, unemployment insurance, various benefits, paid sick days and state family leave. Workers who no longer qualify as independent contractors may assert that they are covered by applicable state civil rights laws, and the workers may have the ability to organize into labor unions. Moreover, a worker who is an employee under an AB 5 analysis may be an independent contractor under a federal income tax analysis.
AB 5 enables the California Attorney General, city attorneys of cities of a certain population, and local prosecuting agencies to sue hiring entities for violations of AB 5. If a hiring entity loses in court, a judge’s order could force the company to reclassify applicable workers.