It has been reported that 42% of American workers have a side-hustle, and most of them would rather work full-time for themselves than at the jobs they have now.
Millions of others already work for themselves and prefer that vocational lifestyle over work as an employee.
Those facts conflict with a new California law that will directly affect about two million California residents working as independent contractors, and presumably, out-of-state contractors working in California.
Assembly Bill No. 5 (A.B. 5) upended 40 years of accepted rules governing what differentiates employees and independent contractors (IC) in California. It reduces the distinction to a three-prong test, commonly referred to as the “ABC Test.”
“For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
(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.”
The new law, in effect January 1, 2020, says that if you want to hire independent contractors you must use this narrow test to prove contractor status or face serious financial penalty.
If you are an IC, you may find it difficult to get work as an IC, even from companies you have supplied services to in the past.
Disaster and Crisis
One legal expert opined that A.B. 5 is “both a disaster and a crisis.”
A.B. 5 codifies the proposition that all workers are employees and the burden of proof is on employers to prove otherwise.
It will shut out possibly millions of Californians from enjoying “self-employment.”
It will unleash a waterfall of litigation by those for and against the legislation, meanwhile, leaving workers and employers in limbo. These lawsuits are likely to go on for years.
It may not cover all situations. If it cannot be determined in court that a worker falls under the purview of A.B. 5, the old rule applies:
“If a court of law rules that the three-part test in paragraph (1) cannot be applied to a particular context based on grounds other than an express exception to employment status as provided under paragraph (2), then the determination of employee or independent contractor status in that context shall instead be governed by the California Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).” (See link below)
It exempts dozens of types of workers who were able to influence legislators but does not exempt others in similar professions. For instance, private investigators are exempt, but executive protection agents are not.
It is subject to retroactive application. The California Supreme Court will decide that matter, a decision that will take months if not years. If the court upholds retroactivity, countless companies that had been working under the old rules could be liable for financial claims dating back several years.
It leaves questions unanswered. For instance, will out-of-state contractors be subject to the law?
What Employers Can Do
Make every worker an employee. That could be financially impractical, especially if staffing levels fluctuate, or special services are only needed occasionally. However, it would eliminate exposure to potentially devastating costs for misclassification violations.
Outsource to a third-party. Again, that may not be practical, and the third-party must assume employer responsibility for maintaining employee status. Employers must be cautious about setting up other entities that would be considered “joint-employers.”
Relocate operations out-of-state. The law is not clear about out-of-state companies operating in California in terms of how California residents of out-state entities will be treated. Furthermore, since California has security licensing laws, this option may not be possible. In addition, some states have already adopted or are considering similar IC laws: Massachusetts, New York, New Jersey, and Illinois for example.
Continue to operate under the old rules. And hope that you don’t get caught. Everything will be okay until an employee or even a contractor files a claim or complaint; a common occurrence. The new law now enables large cities to bring legal action independent of any individual or class-action claim. Status quo is not a good choice.
Seek specialized legal advice. Labor law is a specialized field. Corporate lawyers are not well-suited for this complicated area of law. The cost of a single violation could far exceed the cost of legal advice in advance.
What Independent Contractors Can Do
A.B. 5 makes life difficult for ICs too. Even if you have operated as an IC for years, A.B. 5 may shut you out of contract work; employers won’t want to, or can’t hire you if any of the ABC’s apply to your service. For example, if you’re an EP agent hired on a project basis by a security company, even though you are an established contractor (C), it is likely that you will be under the control of the hiring company (A), and would certainly be considered in the same business: security (B).
A.B. 5 is clear, all the conditions must be satisfied.
However, if the hiring entity is also in the security business but does not normally offer the services that you provide, such as executive protection, and how you provide your service is not under direct control, and you are a bona fide independent contractor, both under the contract for the performance of the work and in fact, those facts may qualify as a proper IC relationship. Again, it is recommended that you get qualified legal advice in advance.
For some practical suggestions and advice about proving your IC business, see “Tips for Becoming or Hiring an Independent Contractor.”
This is only the beginning of the disaster and crisis.
A.B. 5 is bad law. It will do far more harm than good for individuals, businesses, and the state. It will cost jobs and countless private and public sector revenue. It is ironic, that A.B. 5 was conceived to improve worker wages, benefits, and conditions, and generate state tax revenue. It will do just the opposite. It will be a drag on those fortunes, except for the few who finagled an exemption.
The courts will be mired in cases for years and the law will be amended over and over and over.
But there is no use complaining about it, it is now the law.
Additional information about the genesis and evolution A.B. 5, and the Borello Test.
Michael Nossaman is PSC founder
DISCLAIMER: THE INFORMATION PROVIDED HEREIN IS FOR GENERAL INFORMATIONAL PURPOSES ONLY. It does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.
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