California’s Assembly Bill 5, better known as AB5, went into effect on January 1, 2020 and has drastically changed how employers can classify employees vs. contractors. Now, the state’s Supreme Court “ABC test” is the gold standard for determining if a person qualifies as an independent contractor while abiding by the California Labor Code, Industrial Welfare Commission Wage Orders, and California Unemployment Insurance Code. Has your classification system passed the ABC test?
If you haven’t taken a close look at how you’re classifying contractors vs. employees, you’re putting yourself and your company at a big risk—especially now that AB5 is in effect.
When an employee is misclassified, employers could be found in violation of requisite unpaid overtime, and might even be failing to follow minimum wage laws and regulations. Steep consequences can follow including high penalties, lawyer fees, and in some cases criminal liability. Misclassification of workers paves the way to all kinds of trouble for employers, including class action lawsuits.
Revisit Your Classifications Now
Companies should assess their worker classifications on an ongoing basis, but especially now that AB5 has caused changes. One common scenario is the independent contractor who doesn’t want to be an employee, and the employer then trusts that this employee can keep things as they are because they “know” the contractor and trusts they won’t be sued. When a contractor becomes an employee, they have less flexibility and there’s a lot more paperwork for everyone. However, there are more risks beyond the relationship turning sour and the worker suing your company for misclassification.
Problems happen and they might reveal your misclassification. For example, an auto accident that occurs when a contractor is behind the wheel can lead to you being sued by the other driver’s insurance provider. It’s an instant challenge to your misclassification. You might be audited by the state’s Employment Development Department, which performs random audits while seeking tax revenue. Unemployment insurance, disability claims, and workers’ comp can also be catalysts for agencies discovering you’re wrongly classifying someone as a contractor who should be in fact an employee (as contractors do not qualify for any of those programs).
Who’s a Contractor Under AB5?
There’s a stringent three-part test required to classify someone as a contractor instead of an employee. The test reduces the type of work that used to be considered “contract” and rendered millions of Californians as employees. This means millions of workers are now eligible for benefits like Social Security, disability insurance, unemployment, and healthcare (in some cases).
In order to legally classify someone as a contractor and not an employee, they must pass the ABC test:
A: The employer cannot control the worker or direct them in their work performance as defined under the hiring contract.
B: All work performed falls outside the “usual course” of the company’s typical business.
C: The worker is usually involved in an independent and established trade or job that’s aligned with the work being performed for the hiring company.
If this sounds pretty vague, that’s because it is. It’s especially challenging for gig employers such as grocery delivery companies to “pass” the ABC test. There are also some exceptions built into AB5, which further complicates matters for employers.
Exceptions to AB5
Some of the most common occupations that are exceptions to AB5 classifications include lawyers, accountants, MDs, and private investigators. Another exception is what the AB5 calls “bona fide business-to-business contracting relationships,” such as a sole proprietor offering a service or goods to another business. Think about a contracted editor providing editing services to an Etsy shop owner. In these cases, the “provider” (editor in our case example) usually has various clientele and provides similar services to everyone.
Architects, insurance agents, securities broker-dealers, direct sales professionals, commercial fisherman who specifically work on U.S. vessels and specific kinds of healthcare professionals (like veterinarians and podiatrists) may also be exempt. However, just because some workers are exempt because of the ABC test doesn’t mean they don’t have to pass the Borello test—they do. The Borello test is an entirely different but complementary issue. The Borello test is a comprehensive assessment to determine if an employer has the requisite means and manner to achieve a desired result and includes a litany of requirements such as who is supplying the tools (employer or worker), if a worker is “integral” to the business, and much more.
If you’re still not sure how to classify workers, getting professional guidance can keep you, your workers, and your business safeguarded.
