Previously on the blog, we discussed how the California Supreme Court’s Dynamex Ops. W Inc. v. Superior Court ruling created the “ABC Test” for Independent Contractor classifications in 2018. However, in light of the recently-passed California Assembly Bill (AB) 5, a number of exemptions to this test have been created.
Under this new statute, California identifies certain independent contractor exemptions as not subject to the ABC test, but instead subject to the less strict Borello test. Do your independent contractors fall into an exempt category? If so, here’s what you need to know about AB 5 and the Borello test to ensure your contractors are classified correctly.
What is AB 5?
AB 5 is the Legislature’s reaction to the California Supreme Court’s opinion in Dynamex Ops. W Inc. v. Superior Court (2018) 4 Cal.5th 903. AB 5 codified the “ABC test” from Dynamex for purpose of the Labor Code and Unemployment Insurance Code. However, AB 5 establishes numerous exemptions which, if met, mean the more flexible independent contractor Borello test applies. These exceptions include:
- Specific occupations, such as: doctors, professionals, financial service providers, real estate licensees, insurance brokers, licensed hair stylists and barbers, freelance writers and photographers, and repossession agencies.
- Contracts for professional services between a hiring entity and an individual providing professional services.
- Business-to-business contracting relationships between a contracting business and a business service provider (the “business-to business exemption”). This is arguably the narrowest exemption in the statute, as these relationships must satisfy approximately a dozen criteria.
- Relationships between a contractor and an individual performing work pursuant to a subcontract in the construction
- Relationships between a referral agency and a service provider that uses the referral agency to connect with
Professional Services Exemption
AB 5 lists “professional services” as an exemption from the ABC Test. For purposes of worker classification, the statute limits this “professional services” exemption to the following:
Exemption-Eligible Professional Services
- Marketing, provided that the contracted work is original and creative in character and the result of which depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the contracted work.
- Administrator of human resources, provided that the contracted work is predominantly intellectual and varied in character and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.
- Certain travel agent services.
- Graphic design.
- Grant writer.
- Fine artist.
- Services provided by an enrolled agent who is licensed by the United States Department of the Treasury to practice before the Internal Revenue Service pursuant to Part 10 of Subtitle A of Title 31 of the Code of Federal Regulations.
- Payment processing agent through an independent sales organization.
- Certain services provided by a still photographer or photojournalist.
- Certain services provided by a freelance writer, editor, or newspaper cartoonist.
- Services provided by a licensed esthetician, licensed electrologist, licensed manicurist, licensed barber, or licensed cosmetologist, subject to certain restrictions.
Eligibility Criteria for Exempt Professional Services
To qualify for the professional services exemption from the ABC test, the following criteria must be met:
- The worker maintains a business location separate from the hiring entity. Their business location may be their own home. (Note, they may choose to perform services at the location of the hiring entity.)
- If work is performed more than six months after the effective date of this section, the worker has a business license, in addition to any required professional licenses or permits for the them to practice in their profession.
- The worker has the ability to set or negotiate their own rates for the services performed.
- Outside of project completion dates and reasonable business hours, the worker has the ability to set the individual’s own hours.
- The worker is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.
- The worker customarily and regularly exercises discretion and independent judgment in the performance of the services.
In addition, the worker must provide their services through a sole proprietorship or other business entity.
The Borello Test
In applying the Borello test (aka the “economic realities test”), the key is whether the employer has control over the worker. (Both as to the work done and the manner and means in which it is performed.) Additional factors that may be considered depending on the issue involved are as follows:
- If the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal or alleged employer;
- If the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
- Whether the service rendered requires a special skill;
- 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;
- The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the person is to perform the services;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job; and
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
Weighing The Factors
Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary.
Remember that the simple existence of a written agreement claiming to establish an independent contractor relationship is not determinative. Further, simply issuing these works a 1099 form rather than a W-2 form is also not determinative of independent contractor status.
What do you think?
What has been your experience classifying Independent Contractors since the 2018 Dynamex ruling? Do your workers fall into the ABC Test classification category, or are they in an exempt category and able to use the Borello test instead? (Or a combination of both!) If you haven’t already, be sure to revisit our last article on when to use the ABC Test instead of the Borello test in your Independent Contractor classifications.
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