California Bill AB5 Defines Employee Vs. Contractor​

January 21, 2020
On January 1, 2020, California Bill AB5 went into effect. It created stricter guidelines for determining if a worker is an employee or contractor.
Backgrounds Online | January 21, 2020


On January 1, 2020, California Bill AB5 went into effect. It created stricter guidelines for determining if a worker is an employee or contractor.

History Of The Bill

California Assembly Bill 5 (AB5) was signed by Governor Gavin Newsom on September 18, 2019 and went into effect on January 1, 2020. The bill updated a decision made in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles. That case analyzed the definitions of employees and independent contractors as they were previously established in the 1989 case of Borello & Sons, Inc. v. Department of Industry Relations (Borello).

The Borello decision created a “right to control” test to help define an employment relationship. It was used to establish if a worker could be fired “at will”, how a person would be paid for a job and if the parties agreed they were implementing an employer/employee relationship.

In their Dynamex decision, the California Supreme Court created a three-step process called the “ABC Test.” Employers were asked to consider three factors when bringing on new workers. Depending on the outcome, the employer would determine if a worker was an employee or contractor.

Updated ABC Test

Some California legislators felt the ABC Test made it too easy for employers to classify workers as contractors. They updated the test to help ensure more people would be considered employees and thus gain additional rights and benefits. AB5 states that the misclassification of contractors has been a “significant factor in the erosion of the middle class and the rise in income inequality.” The bill intends to codify the ABC test in the hopes of restoring protections to millions of Americans.

With AB5 in place, workers must be considered employees unless all three of the following revised conditions are met:
A: The person 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.
B: The person performs work that is outside the usual course of the hiring entity’s business.
C: The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Exemptions

Multiple exemptions are created by AB5. A few include (but are not limited to):

Various occupations. Examples include licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.

Professional service providers. Examples include travel agents, graphic designers and fine artists. To qualify, these providers must:
· Maintain a business location.
· Be able to negotiate their own service rate.
· Customarily engage in the same type of work performed under contract with another hiring entity.
· Hold themselves out to other potential customers as available to perform the same type of work.

Bona fide business-to-business contracting relationships. To qualify, these must meet 12 separate conditions.

To learn more, read AB5.

Takeaway For California Employers

California employers that have workers they currently deem independent contractors should be aware of and compliant with AB5. The law is active, but some groups hope to have it repealed or modified. Follow this blog for ongoing developments.

Please note that this article is intended for informational purposes only. It is not legal advice of any kind. We recommend having your legal counsel review your hiring policies to ensure they are compliant with all applicable laws.

When you’re bringing on employees, contractors or volunteers, it is important to run comprehensive background checks. The team at Backgrounds Online can help you customize screening packages for any position in your industry. Contact us for expert assistance Monday through Friday from 5am to 6pm PT.