We have been asked for guidance by many of our small business clients regarding the classification of workers as either independent contractors or employees based on the new California law known as AB 5.

Defining Independent Contractor Status Under AB-5

There are certain labor law requirements triggered when a worker is considered an employee rather than an independent contractor. A full discussion of them is beyond the scope of this blog. But, as most employers know, the additional labor law and tax requirements applicable to employees, compared to independent contractors, are significant.

Now we have AB 5, which is a new law effective January 1, 2020. It addresses employment status when a hiring entity claims that the person it hired is an independent contractor. AB 5 requires the application of the “ABC test” to determine if workers in California are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission (IWC) wage orders.

A Worker is an Employee Unless the Work Passes the ABC Test

Under the ABC test, a worker is considered an employee, and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:

1. 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;
2. The worker performs work that is outside the usual course of the hiring entity’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The burden of proof is on the hiring entity to establish that all three of the above conditions are satisfied to establish that its workers are independent contractors rather than employees; otherwise, the workers are considered independent contractors. 

When analyzing our business client’s situation, many times we have found that the “A” prong and the “C” prong of the “ABC Test” may be difficult to apply. However, we have found that many times the “B” prong is easy to assess. To satisfy requirement “B” of the “ABC Test”, the hiring entity must establish that its workers perform work that is outside the usual course of the hiring entity’s business, whatever that business may be. In many cases we have not found the test easy to pass, particularly when the workers perform work that is the same as the type of work offered by the hiring entity in its business. In such event, the workers should be classified as employees rather than independent contractors.
The State of California Labor and Workforce Development Agency gives the following examples as guidance when an employer is trying to determine whether the “B” prong is, or is not, satisfied:

Examples where Part B is satisfied:

1. When a retail store hires an outside plumber to repair a leak in a bathroom on its premises.
2. When a retail store hires an outside electrician to install a new electrical line.

Examples where Part B is not satisfied:

1. When a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company.
2. When a bakery hires cake decorators to work on a regular basis on its custom-designed cakes.

We find these examples straightforward and helpful. Also, important to note is the fact that our business client may have had certain workers sign the agreement titled “Independent Contractor Agreement.” However this does change this analysis or conclusion.

There are many exceptions to AB 5 and other provisions of the law beyond what we have discussed here. An excellent resource from the state of California on this and other related independent contractor/employee questions under AB 5 is at:

California AB5

We used that commentary as a resource for this blog. Of course, like any new law, AB 5 remains subject to interpretation that only time will provide. Meanwhile, consult your business attorney for guidance if you have specific questions about the classification of your workers as employees or independent contractors.

Business Attorneys for Castro Valley, Pleasanton and Central Alameda County

From the day we opened our doors in a small office in Castro Valley dedicated to business law and real estate law, our mission has been to provide prompt, quality, results oriented representation and practical advice to our clients. Contact us for help with legal issues your business may be working through.