Question:

What is this new AB5 independent contractor law in California?

Answer:

The AB5 (effective January 1, 2020) codified the California Supreme Court’s ABC Test for independent contractors which was set forth in the Dynamex case. There is currently a lot of confusion around AB5, the new independent contractor test, and the ABC test, because there is so much uncertainty about enforcement around the new law for independent contractors.

For some clarification about AB5, click the video below to hear commentary from the author of the bill, Lorena Gonzalez Fletcher (California Assembly Member). She describes how you can be a sole proprietor or any type of small business such as an LLC or corporation, and still be exempt from the new law. This essentially means that there is really no change to the independent contractor world if what she says is true. However, it is the courts and Employment Development Department that enforce this new law when determining whether classification of employee versus independent contractor is correct, so there is no guarantee that what Gonzalez Fletcher says will be what they do.

What Exactly Does This Mean?

It’s not as simple and straight forward as Gonzalez Fletcher lays out in her interview. As being a sole proprietor, LLC, or corporation and be exempt from AB5 and the ABC Test, you are still subject to the Borello Test. The Borello Test, unlike the ABC Test, have several factors you have to weigh in order to determine if someone is an employee or independent contractor.

Borello Test factors:

1. Whether the contractor is under the control of the hiring entity;

2. Whether or not the contractor is providing services directly to the hiring parties’ clients or customers;

3. Whether or not there is a written contract in place;

4. Whether or not the contractor is in a jurisdiction that requires a business to have a business tax license (or certificate);

5. Whether or not the contractor maintains a place of business that is not the same as the hiring entity;

6. Whether or not the contractor is regularly engaged in the profession that they are providing to the contracting business;

7. Whether or not the contractor contracts with other clients and customers;

8. Whether or not the contractor holds himself out to be an independent business;

9. Whether or not the contractor has his own tools and equipment.

Above are the types of factors you have to look at under the business-to-business exemption of AB5 to determine whether, even as as individual sole proprietor you can still contract as an independent contractor.

To Wrap Things Up….

There should be no changes to the independent contractor world with regard to small businesses. Though the new law, in a way, repeats laws and wage orders that are already in place so there is a bit of uncertainty of how this new law is going to be enforced. For now, we will just have to see how this plays out. There are already a couple of bills assembly members are drafting to repeal AB5 as well as Gonzalez Fletcher working on bills to clarify AB5.

As always if you have any further questions you’d like answered, feel free to reach out to our team at bertie@inbetterwetrust.com. We’re happy to answer any questions!