California Governor Gavin Newsom in September signed Assembly Bill 5, or AB5, into law, which could have significant impacts on hiring, manning and staffing in California by changing the classification of certain workers from independent contractors to employees. Also referred to as the Opportunity to Work Act, according to the California State Legislature, the bill aimed to protect workers that were not otherwise eligible for minimum wage, sick leave, employment benefits, workers’ compensation and other employee protections. The bill did outline exemptions for doctors, dentists, insurance agents, lawyers, accountants and real estate agents.
The initial intent of AB5 was for unions to ensure employees had the option to unionize. The original targets of the legislation were Uber, Lyft and similar rideshare services who rely on independent contractors. The authors of AB 5 wanted to eliminate the option of being independent contractors, which essentially forced companies to hire people who were formerly treated as independent contractors.
The ramifications of AB5 are astronomical. Almost immediately, the California Trucking Association set out to sue the state of California for now forcing them to hire truck drivers. Many of these truck drivers operate their businesses and own their trucks themselves. The law would essentially force truck drivers to become a business entity, whether a corporation or limited liability company, to continue to operate for hire. If truck drivers were not willing to become a business entity, they would have to be hired on as employees to continue to earn a living. This would limit their flexibility in driving for multiple companies and being able to set their own hours. Many companies that use truck drivers seasonally were also going to face increased costs down the line by bringing on drivers as employees.
A federal judge ruled in favor of the California Trucking Association and granted a preliminary injunction against AB5 for truck drivers. The judge ruled that AB5 conflicts with the Federal Aviation and Administration Authorization Act. The ruling allowed truck drivers to maintain their independent contractor status.
Another round of lawsuits came from the American Society of Journalists and the National Press Photographers Associations. Freelance journalists would be limited by AB5 in the amount of work they can have from a single publisher. Uber and Postmates also filed a lawsuit based on limiting their work. These lawsuits are still pending. From freelance writers, musicians, and actors, AB5 aims to limit contractors to less than 35 jobs from a single company to maintain independent contractor status.
The California Farm Bureau developed a fact sheet of frequently asked questions to ensure farmers are operating within the law. A farmer may have business relationships that fall under AB5, such as farm labor contractors, agronomists, pest control advisors, human relations consultants, or irrigation contractors. The bill lays out an ABC test to enforce the employee status on formally independent contractors that fail to meet all the conditions. AB5 imposed an ABC test for a worker to be classified as an employee if they do not match all requirements. A service provider that is an individual would be subject to the ABC test as outlined in AB5.
- Under the contract for the performance of the work and in performing work, the worker is free from an entity’s control and direction
- The work performed by the worker for the entity is outside its usual course of business
- The worker is customarily engaged in an established trade, occupation or business of the same nature as that involved in the work performed.
Businesses are not eligible under the ABC test because they are considered an entity, not an individual. Only individuals could be classified as an employee or an independent contractor. AB5 outlines a business to business exemption. To be eligible for a business to business exemption workers must meet the Borello Test 12 criteria to be classified as a business and not an individual.
The following criteria are outlined to ensure service providers are operating as a business and not an individual:
- Be free from the control and direction of the service recipient business in connection with the performance of the work.
- Provide services directly to the service recipient business rather than to its customers.
- Have a written contract with the service recipient business.
- Have any required business license or business tax registration.
- Maintain a business location that is separate from the business or work location of the service recipient business.
- Be customarily engaged in an independently established business of the same nature as that involved in the work performed.
- Contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.
- Advertise and hold itself out to the public as available to provide the same or similar services.
- Provide its own tools, vehicles and equipment to perform the services.
- Be able to negotiate its own rates.
- Be consistent with the nature of the work, set its own hours and location of work.
- Not perform the type of work for which a license from the contractors’ state license board is required.
It is essential to ensure that a business meets all these qualifications. Purely being a sole proprietor doesn’t guarantee classification as a business. The flexibility of being an independent contractor has now changed. The state of California wants to ensure service providers are operating as an actual business and paying appropriate taxes. Many companies and even attorneys are unsure how and what businesses should do to adjust their dealings to comply. It is always best to consult a lawyer to understand how new laws impact a business.
Within the California Farm Bureau fact sheet, there is a description to help make sense of the service recipient business exemption criteria. “As a practical matter, a farmer or rancher receiving services under a properly written contract from a law-abiding, separately established business that has and advertises for other customers/ clients, that exclusively controls how its services are provided, and that performs its services using its own tools, vehicles, and equipment should be able to show the 12 business to business exemption criteria apply and the service providing business is an independent contractor under the Borello test. This is especially true for the service business organized as an entity such as a corporation or limited liability company, as opposed to a sole proprietorship.”