Independent Contractor Status: The ABCs of AB-5

California Assembly Bill 5 (AB-5) went into effect on January 1, 2020 and requires employers that retain independent contractors (ICs) to reclassify them as employees. Immediately following the approval of AB-5, Proposition 22 overrode AB-5 concerning app-based drivers. Although AB-5 originally intended to cover “gig worker” employee classification status, employers must remain diligent in classifying employment status to temper the ever-greying “grey area” of what is considered IC status. The saga continued with a series of attempts (specifically AB 1227 and SB 850) to adjust and or clarify IC status – both of which failed to pass.  However, recently AB 2257 was successful in creating professional services exemptions to the ABC Test.  With all these changes, employers should remain vigilant to ensure that they are properly classifying employees.

Regardless of the industry or organization, the result of evolving employee IC classification is an ever rising “higher bar” for employers now faced with the total burden of proof. Although this is hardly a straight-forward area of the law, there is a streamlined approach and three-pronged test to prove workers are ICs and not employees. We call this the ABC’s of AB-5. Following our first article in the series, we will include additional information on some of the more specific provisions and exceptions to the ABC test. However, let’s get started with what the ABCs do involve as a “big picture” initial starting point for employers:

• 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.”

AB-5 provides some exemptions from the ABC test that do not establish workers are independent contractors. Instead, employment status of those workers falling within one of the AB-5 exemptions is analyzed under the independent contractor test established in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, where a worker “will be considered an employee where the employer exercises all necessary control by direct or indirect means over the work details of the worker.”

Of course, there are several Borello factors to consider when determining independent contractor status, such as:

• Work performed is not regular business of principal
• Unique skill in particular occupation
• Supplies own tools and workplace
• Significant investment in equipment or materials
• Opportunity for profit or loss
• Control over time and place where work performed
• Can hire own employees
• Services are to be provided with timeframe reflective of task hired to perform
• Method of payment is time certain or project specific
• Parties believes creating independent contractor relationship
• Customarily engaged as independently established business
• Non-exclusive relationship
• Holds license to perform work
• Relationship not terminable at will by principal

While AB 2257 does provide professional services exemptions to the ABC Test, it is important to remember that even if an employee meets an exception to AB5 they will still have to meet the Borello factors to be considered an independent contractor. Stay tuned for our next article in the series entitled, “Independent Contractor Status: AB 2257 Exemptions to the ABC Test.”