California’s New AB5 Legislation: The ABC Test and What You Need to Know to Stay Compliant

California’s sweeping legislation AB5 is going to significantly alter the employment landscape in California and companies are going to quickly need to find solutions to their newly labeled Independent Contractor/1099 risk. With the Dynamex decision, California employers have already begun to see lawsuits, class actions, and complaints starting to roll in from various trades that have been previously classified as independent contractors. With the codification of these principles through AB5, we will only see this area of litigation continue to grow.  Much of the focus surrounds the “B” component of the ABC Test. The “B” prong of the test requires that “the worker performs work that is outside of the ‘usual course’ of the company’s business.”  How do you define “outside of the usual course of business?” In California, which has always been an employee-centric state, almost any role or trade is going to have a much tougher time presenting an argument for why they should be classified as a 1099.

AB5 Compliance and 1099 Classification, California’s New AB5 Legislation: The ABC Test and What You Need to Know to Stay Compliant

Now remember, for an Independent Contractor to pass the ABC Test and be considered properly classified, ALL 3 prongs must be met.

A) Work must be free from control and direction (we can usually figure this one out; your tools, your time, your expertise as a professional).

C) The worker is customarily engaged in an independent trade of the same nature as that involved in the work performed. This can easily be satisfied if the individual provides these same services to others in an independent fashion.

But now, the “B” prong is back…”Outside the usual course of business.” While there is a lengthy list of professionals that have been able to lobby for exemption from AB5 (which includes doctors, insurance agents, lawyers, accountants, real estate agents, hairstylists, graphic designers, and many others), many current independent contractors and companies are left questioning the application of “B.” For example, is a computer programmer outside the course of business for ANY company.

AB5 Compliance and 1099 Classification, California’s New AB5 Legislation: The ABC Test and What You Need to Know to Stay Compliant

Let’s use TargetCW as the company in the example posed above.  We are a global contingent workforce management company that is technology-driven. It is on our website, in our values, listed on our core documents, and addressed by our privacy site. However, we usually only need a front-end website developer four times a year to refresh our look. Traditionally, we have hired an independent contractor that can complete the project within a few weeks. However, if we were to apply the “B” prong of the ABC Test or found ourselves in front of a Judge, could we honestly say that a website is “outside” the usual course of TargetCW’s business when we have 60,000 plus visitors a month to our site? Well in the words of every lawyer that has ever practiced: “It depends.” I’ll leave that to TargetCW’s Legal Compliance Team to run the ABC Test.

Of course, we can use the more straightforward example that the media is heavily focused on these days – can the ride-share companies say drivers who generate the majority of their income is outside of their usual course of business? Good luck with selling that!

AB5 Compliance and 1099 Classification, California’s New AB5 Legislation: The ABC Test and What You Need to Know to Stay Compliant

 

Or what about truckers who are historically 1099’s, movie stars, actors, artists, production workers, and the like? Unions are already speaking out, saying that the law isn’t intended for ‘them’. Certainly, exceptions are going to be made by the legislature, but in the meantime, we’re all at risk.

You also have to be weary of the talent cloud. Just because a contractor is hired through UpWork, Fiverr or one of the other services, doesn’t mean you are safe. Those companies will have a lot of liability mitigation of their own and may have to re-engineer the way in which they generate revenue. It’s a new world for California and we all need to be more careful, remembering the wise old saying “don’t be penny wise and pound foolish”.

AB5 Compliance and 1099 Classification, California’s New AB5 Legislation: The ABC Test and What You Need to Know to Stay Compliant

Our advice (obviously consult your attorney); if you are in California, get rid of your independent contractors unless they are CLEARLY independent contractors under the ABC Test. Even if an independent visits your California facility, then the independent contractor would be governed by the laws in California for that period of time and you may be out of compliance.

Further Reading:

https://www.targetcw.com/blog/1099-misclassification-penalties-in-ca-new-2012

https://www.targetcw.com/blog/97

Check out the Law:

Check Out The Law on Wikipedia

 

 

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