New California Independent Contractor Law Takes Effect January 1

Several months ago, the California Supreme Court established a new test for determining whether a worker should be classified as an employee or an independent contractor. Now that test will be enshrined in law on January 1, 2020, as the California legislature has passed AB-5.

Here is the standard classification test under the new law:

A worker will be considered an employee, rather than an independent contractor, unless the hiring entity can demonstrate all of the following:

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

A couple of points are worthy of emphasis. First, the presumption is that a worker is an employee. That is the default classification. Second, as I pointed out in my earlier post on the subject, a lot of companies are going to get hung up on the second prong – that the worker must be performing work outside of the usual course of the hiring entity’s business. So delivery companies like Fedex and UPS are going to have a hard time classifying delivery drivers as contractors, and software companies like Google and Facebook are going to have a hard time classifying software developers as contractors.

As you might expect, the lobbyists were working hard on this bill, and there are a lot of exceptions. One of the biggest exceptions is for business-to-business contracting relationships. The standard test will not apply if all of the following are satisfied:

  1. The business service provider is free from the control and direction of the contracting business in connection with the performance of the work, both under the contract for the work and in fact;
  2. The service provider is providing services directly to the contracting business, rather than to customers of the contracting business;
  3. The contract is in writing;
  4. If the work is performed in a jurisdiction that requires the service provider to have a business license or business tax registration, the service provider has the required license or tax registration;
  5. The service provider maintains a business location that is separate from the business or work location of the contracting business;
  6. The service provider is customarily engaged in an independently-established business of the same nature as that involved in the work performed;
  7. The service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity;
  8. The service provider advertises and holds itself out to the public as available to provide the same or similar services;
  9. The service provider provides its own tools, vehicles, and equipment to perform the services;
  10. The service provider can negotiate its own rates; and
  11. Consistent with the nature of the work, the service provider can set its own hours and location of work.

Finally, there are a number of exemptions based on occupation. Here are some examples:

  1. Physicians, surgeons, dentists, podiatrists, psychologists, veterinarians
  2. Lawyers, architects, engineers, private investigators, accountants
  3. Securities broker-dealers or investment advisors
  4. Direct sales salespersons
  5. Certain professional services – marketing, human resources administrators, travel agents, graphics design, grant writers, payment processing agents, licensed estheticians, licensed electrologists, licensed manicurists, licensed barbers, licensed cosmetologists, freelance writers

Please note that for some of these occupation-based exemptions, there are additional requirements that must be met. If you need further information on how a worker should be classified, please contact us.

 

 

This post is an advertisement for legal services.