At the start of the year California Assembly Bill 5 (AB5) went into effect, effectively reshaping the legal definition of what defines an independent contractor in the state. It also created a lot of controversy among trucking companies and the businesses that they serve.
On January 16, 2020, the United States Southern District Court granted a preliminary injunction for the California Trucking Association and independent truckers.
What does this mean? That remains to be seen.
However, if your company provides or relies on trucking services, there’s still going to be some confusion among classifications that you need to pay attention to.
The law was initially developed to address worker misclassification, however, it’s creating a lot of confusion for companies who have relied on California’s “gig economy” to conduct business.
With AB5, employers are now required to conduct a three-pronged “ABC Test” to determine a worker’s classification (as originally implemented in the landmark Dynamex Operations West, Inc. v. Superior Court of Los Angeles case in 2018).
As opposed to previous standards in California, this new definition of an independent contractor is much more strict. The law expands the ABC Test’s application to include all provisions in the State’s labor and unemployment insurance codes.
Essentially, a workers default status will be that of an “employee” unless an employer can prove otherwise according to specific guidelines or exceptions.
Under the law, a worker can only be classified as an independent contractor if they meet all of the following conditions:
- A) 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;
- B) The worker performs work that is outside the usual course of the hiring entity’s business; and
- C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The new law applies to all except those in several categories that were specifically exempt from the new testing standards. These exempt workers are not automatically defined as independent contractors. Instead, they are still required to partake in the Borello test—which was used prior to AB5’s passing.
- Doctors, surgeons, dentists, podiatrists, psychologists, or veterinarians performing professional or medical services provided to or by a health care entity;
- Lawyers, insurance brokers, architects, engineers, private investigators, or accountants;
- Securities brokers/dealers or investment advisers and their agents and representatives that are registered with the Securities and Exchange Commission, the Financial Industry Regulatory Authority or the State of California;
- Real estate agents, repossession agencies, direct-sales persons, commercial fishermen;
- Individuals performing services under a contract with a licensed “motor club.”
Professional Service Exemptions
- marketing professional;
- human resources professional;
- travel agent;
- graphic designer;
- graphic artist;
- fine artist;
- freelance writer;
- barber or cosmetologist;
- payment processing agent; and
- IRS licensed tax professional.
Qualifications of a Professional Service Provider:
- Have an established business location (may be home);
- Have any required business license or occupational license;
- Have the ability to negotiate rates;
- Maintain the ability to set hours outside of project completion dates;
- Engage in the same type of contract work with other companies, or must hold themselves out to other potential customers; and
- Exercise discretion and independent judgement in their work.
What Should Your Business Do?
As the law settles and we look closer at how it’s interpreted and applied overtime, it’s a good idea to take a few proactive steps to ensure you’re in compliance.
First, ensure that you are extra diligent about defining your business, your employees and the relationships you have with independent contractors. You need to define those lines in the sand, document these arrangements, and double check that you aren’t overlooking any long-term contracted support as well.
While the law is currently exclusive to California, if you operate outside of the state, it’s probably a good idea to remain extra diligent as you grow your workforce—and plan for the possibility of this ruling having an impact beyond the Golden State.
For now, if you have questions regarding this ruling, how it pertains to your business and what it may do to your coverage, please don’t hesitate to contact me.