Governor Gavin Newsom signed legislation placing in law the test for determining when a worker is an independent contract as outlined in a California Supreme Court decision last year.
AB 5 codifies the “ABC” test adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles. AB 5 and its exemptions go into effect on January 1, 2020.
Much of the talk surrounding AB 5 has focused on the impact the ABC test will have on gig economy jobs, as the new classification test jeopardizes the flexibility and income opportunities the modern employment model provides for thousands of California workers. However, the legislation will affect more than those in the gig industry — it stands to affect nearly every sector of the economy.
The following industries and professions are exempt from the ABC Test:
- Insurance agents
- Securities broker-dealers or investment advisers, who are registered with the SEC FIRA or licensed by California
- Physicians, surgeons, dentists, podiatrists, or psychologists
- Licensed lawyers, architects, private investigators, accountants and engineers
- Direct sales salespersons
- Licensed realtors
- Hair stylists/barbers, estheticians, cosmetologists, electrologists and manicurists, subject to narrow circumstances
- Travel agents
- Graphic designers
- Fine artists
- Enrolled agents licensed by the U.S. Treasury to practice before the IRS
- Payment processing agents
- Photographers and photojournalists (35 submissions or less)
- Freelance writers, editors or newspaper cartoonists (35 submissions or less)
AB 5 also has several broader exemptions for contractors and subcontractors:
- Business to Business Contracts: For two businesses that contract for services that are provided directly to the contracting business, and not the customer/client (doesn’t include work for which a license is required by the Contractor’s State License Board).
- Construction Contractor/Subcontractor: For this business relationship if certain conditions are met, including the subcontract assumes financial responsibility for all errors or omissions in labor or services, evidenced by insurance, indemnity clauses, performance bonds or warranties.
- Construction Trucking Services: Trucking services only in the construction industry if the trucking contractor registers with the Department of Industrial Relations as a public works contractor, even if the work is not public work; utilizes its own employees to perform the work; the trucking contractor does not utilize a broker.
Classifying Independent Contractors
The Dynamex decision upended the way businesses in the state distinguished employees from independent contractors. In Dynamex, the Supreme Court concluded that individuals are presumed to be employees, and a company classifying an individual as an independent contractor bears the burden of justifying that individual’s independent contractor classification under the ABC test.
The ABC test replaces the previously utilized “right to control” or “common law” test, which focused on the hiring entity’s ability to control how the work was performed. Under the more restrictive ABC test, an individual is presumed to be an employee, unless the company can prove all of the following
- That the worker is free from 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
- That the worker performs work that is outside the usual course of the hiring entity’s business; and
- That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
If the hiring entity fails to show that the individual worker satisfies each of the three criteria, the worker is treated as an employee, not an independent contractor.