California's AB5 -- Are we having fun yet?
I know you’re all anxious to understand what it means, so let’s skip to the
The technical term for AB5 is the “Attorneys Full Employment Act,” or more commonly
known as “a hot mess.” In fact, there’s already a preliminary injunction
barring enforcement of AB5 as to motor carriers of property (so not the Uber
and Lyft folks who drive people). See, I told you it was the full employment
for attorneys act. That one case has oodles of attorneys.
But I’m sure you’re not interested in my editorial comments. So, here’s a practical
summary, and the AB5 safe harbors:
People who are ICs, even under AB5 without having to go through a more complicated analysis than before AB5.
Independent Contractors [ICs] who reside and work outside California.
No Contractors who live or work in California.
People who NOT ICs but employees in California without having to go through a more complicated analysis than before AB5.
All contractors, even corporations, LLCs etc. who live or work in California.
Now that you know how this story ends, if you want to hear the middle, here we go. Well not yet. First, a little background.
The core of AB5 is new Labor Code Section 2750.3, and specifically sub-section (a) (don’t you love it when I talk legalese?). That consists of 149 words. Sub-sections (b) through (h) consist of 3,478 words of exceptions and exceptions to the exceptions of sub-section (a). And then there are two sub-sections about enforcement stuff.
I think you can see that digging through this is, well it’s tough sledding, and then ultimately sleep inducing. But if you have a business in California, you need to know this stuff. And if you’re a contractor, you need to know that in many cases even incorporating won’t allow you to continue to work independently, so you can start calling the moving company.
So now, get some caffeine, and buckle your seat belt.
AB5 Consists of one new statute (Labor Code Section 2750.3(a) - (j)) and modifications to three existing laws: Labor Code Section 3351 and Unemployment Insurance Code Sections 606.5 and 621. This memo will discuss Labor Code 2750.3.
As stated in AB5 itself:
It is the intent of the Legislature in enacting this act to include provisions that would codify the decision of the California Supreme Court in Dynamex and would clarify the decision’s application in state law.
Wow, clarity. That would be great. But I'm thinking about 3400 plus words of exceptions and excecptions to the exceptions. But maybe that does clarify things.
To understand AB5 and its significance, you need to understand that it involves two standards to determine IC v. employee status in California. Both standards are from California Supreme Court cases: Dynamex decided in 2018, and Borello decided in 1989. I know, you’re not an attorney so you assumed you would never need to learn about California Supreme Court Cases.
But this statute refers to you back to two law suits, one of which attorneys have been arguing over since 1989 - so much for "Clarifying the law. So how is adding special rules, and then referring you back to the same cases that caused the confusion a clarification?
But yes, AB5 actually says that you have to apply these court case standards (and lots of other specific rules) in many specific circumstances, so when I say you NEED to know about these cases, you NEED to know about them. I really am trying to make this comprehensible to lay people.
For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
(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.
(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.
After sub-section (a) which codifies Dynamex, come sub-sections (b), (c), (d), (e), (f), (g) and (h) They list exceptions to the rule in (a). Some say “don’t apply Dynamex, apply Borello instead; and other say don’t apply either, some say apply one or the other, but also apply these super special rules in this super special situation.
Since in some situations you have to apply the Borello standard (which I'd like to remind you has been causing arguments among attorneys since 1989), let’s see what Borello says.
The standard is whether the service recipient (the hiring entity) has control over the service provider, which is basically (A) from sub-section (a) (remember (a) had three sub-sub-sections: (A), (B), and (C)). So the cases are similar up to there. But since control is difficult to establish, Borello listed a bunch of factors that the court could look at to determine control, which determines status.
Among these factors are whether the worker performs work that is outside the usual course of the hiring entity’s business and whether the worker is normally engaged in an established business doing the work being done for the hiring entity. These two factors are sub-sub-paragraphs (B) and (C) in AB5. And then Borello also looked at some other factors that can be used to show control. In fact, the IRS lists 20 factors but they all are used to establish the biggie: control.
Of the 20 factors, (B) and (C) from AB5 have always been the two that I’ve said are the most important. In the past I went so far as to say those two are like two lenses
which the government looks through to determine status. If the lenses are good
and indicate IC status, all of the other factors become less important. If the
lenses are bad (point to employment) not much else matters.
Because of this, I have always felt that Dynamex, a newer case, did not substantially change the Borello standard.
But AB5 goes way beyond this. And that’s where the problems come in. and why I said the snarky things about this law at the start of this article.
There are two preliminary things to note about sub-section (a) beyond providing the three determining factors:
- AB5 only applies to issues brought under the Labor Code, and the Work Orders which are regulations under the Labor Code, and the Unemployment Code. AB5 doesn’t apply to the IC-employee determination for other purposes like Fair Employment and Housing Act claims, claims brought under negligence or contract law, or even workers’ compensation (although it will apply there in July 2020).
- It applies to all “person’s” who do stuff for remuneration (a fancy word for compensation); and Labor Code 18 defines “Person” as “Person” means any person, association, organization, partnership, business trust, limited liability company, or corporation.
So AB5 covers corporations, LLCs etc. and people. This is the ONE really big change in the law, since I've always believed that in many cases Dynamex and Borello will result in the same determination. But in the past legally formed California corporations and LLCs, even if owned by only one person, were automatically determined to be ICs. Now they are not.
So that’s the codification of Dynamex. Now let’s look at the clarification of its application (that would be the over 3000 words (b) through (h) that list the exceptions to (a).
Subsection (b) lists 10 specific professions and job categories that will be determined under Borello rather than Dynamex as codified in (a). So this is simple. Look at the list in (b), if the worker isn't on the list - apply Dynamex as codified in (a); if the worker is on the list, apply Borello. But wait, that's just (b).
(c) lists 15 types of work and specific jobs that are determined under Borello, but only if they meet 6 specific additional criteria, if they don’t meet those criteria, determination is made under AB5(a), the Dynamex standard; but if they do meet the 6 criterial, they are determined under Borello.
This is the first example of AB5’s second Big Change after including corporations and other legal entities. Under Borello, all of the 20 factors (including the Dynamex factors) were just that, factors that would be looked at, but the decision was made on a case by case factual basis; and under Dynamex control (A) and the two other factors (B) and (C) were “must haves.”
Now under (c) we now have 6 additional specific facts that must be present to establish that a person was working as an independent contractor, but only in those 15 specific professions and job categories.
Note for people who were taught to outline the old fashioned way. This sub-section (c) is small (c), not Capital (C). Small (c) is one of the exceptions to small (a) and is a sub-section, while capital (C) is one of the required factors under small (a), and sometimes a sub-sub-section under other small letter sub-sections. This offends my sense of order where things should start with roman numerals, then capital letters, than arabic numerals and then small letter. But I digress.
So now you look at the (b) list of 10 professions, then you look at the (c) list of 15 types of work and the 6 additional criteria. But wait, we're only at (c) and we have to get to (h).
Exceptions (d) and (f) each list two more industries that can be evaluated under Borello or under specific statutes, and each of which provide some, but not all of the 6 criteria listed in (c), as well as some additional criteria, but of course, not the same additional criteria.
Up to here we have 29 specific professions, industries, or job descriptions that are exceptions to sub-section (a)’s codification of Dynamex but not all with the same rules.
(e) is a lovely catch-all about “business to business” arrangements, and makes an odd juxtaposition saying an individual performing services for another is not the same thing as a sole proprietor, which is a unique concept, found no where else in the law that I know of.
(g) deals with people who provide services through a referral agency.
(h) deals with Motor Clubs. I know – motor clubs? Motor clubs get a special sub-section of their own? That, my friends, is lobbying (or a legislator with a Porsche, Corvette or other fast car) in action.
I have a list of all of the professions, industries and job descriptions that are NOT determined under Dynamex because of those sub-sections (b) through (h) and a brief description of how to guess whether the person (corporation, LLC etc.) is an IC or
employee. It is available to anyone who
has not fallen asleep or moved out of California yet. Contact me if you want it.
So you have three choices. Spend a lot time determining each contractor’s status under AB5; spend a lot of money asking an attorney to make the determination; or only contract with out of state service providers. In both of the first two cases, please understand that individual California regulatory agencies may not make the same determination you or your attorney does.
Are we having fun yet?