The California Legislature recently enacted AB5, a law that will have far reaching effects for California businesses and workers. AB5 makes it more difficult for many, but not necessarily all California businesses, to treat their workers as independent contractors as opposed to employees.
The ABC’s of AB5
Under the old law, whether a worker could be considered an independent contractor was governed by the Borello test. The Borello test weighed several factors that included:
(1) whether the one performing services is engaged in a distinct occupation or business;
(2) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
(3) the skill required in the particular occupation;
(4) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
(5) the length of time for which the services are to be performed;
(6) the method of payment, whether by the time or by the job;
(7) whether or not the work is a part of the regular business of the principal; and
(8) whether or not the parties believe they are creating the relationship of employer-employee.
This test creates some uncertainty. It is not always clear whether a worker was an employee or independent contractor under the Borello test. Some factors could weigh in favor of a worker getting employee treatment, while other factors could weigh in favor of that particular worker receiving independent contractor treatment. Like any type of multi-factor balancing test, it is subject to a great deal of subjectivity.
In 2018, the California Supreme Court issued an opinion in the Dynamex case that created a three-part test (the ABC test) for determining whether a worker was an employee for wage order purposes. This test eliminated much of the uncertainty that existed with the Borello test because rather than weighing multiple factors, the test required a worker to pass all three parts of the test to qualify as an independent contractor.
Many in the tax community wondered whether the EDD or courts would extend the ABC test to other areas like employment taxes. The California legislature settled the tax community’s questions by enacting AB5.
AB5 generally provides that a worker is an employee and not an independent contractor unless the hiring entity demonstrates the worker passes all three parts of the ABC test. The ABC test is:
(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; and
(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.
If a worker’s relationship fails any part of the ABC test, the worker is generally considered an employee.
AB5 did not completely kill Borello. Certain groups of workers are still covered by the Borello factors under AB5 like physicians, attorneys, and accountants. Under certain circumstances, workers like real estate agents, fine artists, cosmetologists, and construction subcontractors may also be governed by the Borello factors.
AB5 also did not extend the ABC test to workers that qualify as statutory employees and statutory non-employees. Statutory employees are workers who will always be employees regardless of where they stand under the ABC test or the Borello factors. Statutory non-employees are workers who are independent contractors regardless of where they stand under the ABC test or Borello test.
For a complimentary case evaluation, please call 619-595-1655 or inquire online today.