Posted October 2019 by S. Ward Heinrichs
AB5’s Exemptions Swallow Much of the ABC Independent Contractor Test
The Governor signed AB5 and, thereby, codified the ABC independent contractor test that the California Supreme Court had ushered-in with its Dynamex decision. The law will require employers to pay many former independent contractors as employees. Further, under AB5, the ABC test will apply to most employment laws rather than just the Wage Orders as required by Dynamex. However, the law has many exemptions in it that will allow certain types of business relationships to remain as independent contractor relationships.
AB5 says that the old Borello independent contractor test, or another test under other code provisions specifically identified in AB5, will still apply to the following broad categories of exempted businesses and business relationships: (1) person or organization licensed by the Department of Insurance, (2) physician and surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the State of California, (3) an individual who holds an active license from the State of California and si practicing one of the following recognized professions: lawyer, architect, engineer, private investigator, or accountant, (4) registered securities broker-dealer or investment adviser or their agents and representatives, (5) direct sales salesperson, (6) commercial fisherman working on an American vessel, (7) those working as qualified professionals in: (a) marketing, (b) human resources, (c) travel agencies, (d) graphic design, (e) grant writing, (f) fine art, (g) IRS enrolled agent services, (h) payment processing through an independent sales organization, (i) still photography or photojournalism, (j) freelance writing, editing, or newspaper cartoon drafting, (k) licensed esthetician, licensed electrologist, licensed manicurist, licensed barber, or licensed cosmetologist, (8) licensed real estate agent, (9) license repossession agency, (10) business to business contractors who meet the requirements under a multifactored test, (11) qualifying construction sub-contractors, (12) referral agency that meets the requirements of a multifactored test, (13) certified motor club.
AB5 describes specific and detailed criteria for a business to meet before each of the above exemptions applies. Accordingly, workers who potentially fall within those exemptions, and businesses that hire such persons, must review the qualifying criteria to be sure that the worker meets the requirements of an exemption.
Potentially, the broadest exemption is the business to business contractor exemption, but the multifactored test for that exemption will limit its application. The contracting business that may meet those requirements can be a sole proprietorship. However, the contracting business must provide services directly to the business with which it has a contractual relationship. In contrast, it cannot provide services directly to the clients of the business with which it has that contractual relationship. Further, the contractor, whether sole proprietor or other type of business, must have its own clients, publicly hold itself out as an independent business, set its own rates and hours, and meet applicable licensing and certification requirements.
Much of AB5 is not entirely clear, and the courts will need to define limits for some of the exemptions. Regardless, the ABC test is here to stay, and if a business or business relationship does not qualify for an exemption, then the ABC test will determine which workers are employees and which ones are independent contractors.
S. Ward Heinrichs, Esq.
Employment Law Office of Ward Heinrichs
4565 Ruffner Street, Suite 207
San Diego, CA 92111
(858) 408-7543 (fax)