Independent Contracting After AB-5

October 9, 2019

NFIB Small Business Legal Center

• We are the voice for small business in the courts and the legal resource for small business owners nationwide.

• While the information provided in this presentation is intended to be accurate, it should not be considered legal advice. The Legal Center cannot be held responsible for any errors or omissions.

Agenda

• Preexisting Rules for evaluating independent contracting relationships.

• The Dynamex ABC test.

• AB 5’s expansion and codification of ABC test.

• AB 5’s 37+ haphazard exceptions.

• Unresolved Issues.

The Risk of Misclassification

Enforcement Priority

Its not just a labor issue, it’s a revenue issue.

Its easier to collect income taxes from employees.

No one is paying into state unemployment or workers compensation funds if the worker is designated as an independent contractor.

Major Liabilities for Misclassification

• Lawsuits for backpay, including for overtime, expenses, mileage.

• Government penalties, including for missed meal and rest breaks.

• Payment of 100% employment taxes.

• Insurance premiums, possibly back-payment.

• PAGA liability.

• Attorney’s fees.

A Cautionary Tale

• Leevson v. Aqualife USA, Inc. • Plaintiffs were required to create independent corporate

entities, and signed contract stating they were not employees.

• Plaintiffs worked on a sales commission basis for Aqualife.

• Jury found they were misclassified because of the degree of control exercised over their work.

• Plaintiffs awarded $173,557 in damages.

• Plaintiffs awarded $139,800 in attorneys fees.

($313,357 total liability)

The Challenge of Classifying Workers

Why does misclassification happen?

Small businesses spend inordinate time and energy on regulatory compliance issues, without benefit of HR professionals.

Employees also cost an estimated 30% more than contractors with insurance costs, added benefits, etc.

Why does misclassification happen?

“Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent, entrepreneurial dealing.”

Board v. Hearst Publications,322 U.S. 111 (1944)

Various Tests

• Federal tests:• IRS – Common law.

• DOL – Economic realities.

• State tests:• Many track IRS or DOL.

• Hybrid Tests.

• ABC test(s).

Legal Landscape Before Dynamex?

• Since 1989 California courts had applied a balancing test, considering numerous factors.

• Ultimate question: Whether business had the “right to control” the work?

• Examples of Borello factors: • Whether the hiring entity had the ability to discharge the

worker at will?

• Whether significant skill was required?

• Whether worker used their own tools?

Evolving working relationships

• More people are working from home, and not in a traditional workplace.

• As technology better enables the “on demand” economy, more people are engaging in freelance work.

The Dynamex Surprise

California Supreme Court Creates “ABC” Test

• “Taken as a whole, under the new [ABC] standard, employers may not engage an individual as an independent contractor unless that worker has established an independent business to provide services that are unrelated to the employer’s own course of business.”

-Tamara Kurtzman, Deconstructing Dynamex.

An Especially Rigid ABC Test

• A – Free from Control of the sort exercised over employees.

• B – Must perform work distinct from employees in the “usual course of business.”

• C – Worker has “take[n] the usual steps to establish and promote his independent business…”

The Dynamex Surprise

• A – Free from Control of the sort exercised over employees.

• Do not treat contractors like employees.

• It was highly problematic that Dynamexhad previously treated its couriers as employees before switching them to independent contractors.

The Dynamex Surprise

• B – Must perform work distinct from employees in the “usual course of business.”

• Tremendous risk if contractors are integral to your business model.

• Would he or she be viewed by others as working in your business?

The Dynamex Surprise

• C – Worker has “take[n] the usual steps to establish and promote his independent business…”

• Require documentation to establish that the consultant is truly an independent contractor, such as business cards, licenses, incorporation, advertising materials, and certificate of insurance.

• Are they using their own tools, equipment, facilities, employees?

The Dynamex Surprise

• C – Worker has “take[n] the usual steps to establish and promote his independent business…”

• Independent contractors should be free to decline work and to provide their services to other businesses.

• There is great risk if they do not have other clients.

What are the Rules?

Enactment of AB 5

• Codifies and expands application of Dynamex ABC test.

• Applies for any labor code issue.

• Invites PAGA lawsuits.

• Applies in EDD audits.

• Applies in Workers Compensation cases.

• Carves out at least 37 haphazard exemptions for various industries.

Contractor or Employee?

Dynamex ABC Test AppliesBorello Balancing Test Applies

Does the worker qualify for an occupational exemption?

Does the worker qualify for a “professional” exemption?

Do you qualify as a referral agency?

Do you qualify for a business-to-business

exemption?

Can you meet the requirements for a construction industry exemption?

Yes

Yes

Yes

Yes

Yes

No

No

No

No

No

Occupational Exemptions

• Doctors, surgeons, dentists, podiatrists, psychologists, or veterinarians.

• Lawyers, insurance brokers, architects, engineers, private investigators, or accountants.

• Securities brokers/dealers or investment advisers and their agents and representatives.

• Real estate agents, repossession agencies, direct-sales persons, commercial fishermen.

Professional Exemptions

• (1) Marketing; (2) Human resources;

• (3) Travel agent; (4) tax professional;

• (5-6) Graphic designer or artist;

• (7) fine artist; (8) freelance writer;

• (9) barber or cosmetologist;

• (10) manicurist; (11) esthetician;

• (12) electrologist; (13) payment processing agent.

*Free lance writer cannot publish more than 35 pieces in a year.

Do I qualify for a professional exemption?

Dynamex ABC Test Applies Borello Balancing Test Applies

Am I in the right profession?

Do I have an established business location?

Do I have required business and occupational licenses?

Can I set my own hours, outside project

completion dates?Can I set my own rates?

Yes

YesYesYes

Yes

No

No

No No

No

Do I engage in the same type of work with other companies, or hold myself

out to other potential customers?

Do I exercise discretion and independent

judgement in my work?

Yes

No

Yes

Yes

Restrictive Rules for Hairstylists / Cosmetologists

• Set their own hours;

• Set their own rates;

• Select their clients;

• Schedule their own appointments;

• Keep their own book of business;

• Paid directly by their clients;

• Process their own payments.

Referral Agency Exemptions

Are you referring customers to providers for the following services?

(1) graphic design; (2) photography;(3) tutoring; (4) event planning;(5) moving; (6) minor home repairs;(7) home cleaning; (8) errands;(9) furniture assembly; (10) animal services;(11) dog walking; (12) dog grooming;(13) web design; (14) picture hanging;(15) Pool cleaning; or (6) yard clean-up.

Do I qualify for a referral agency exemption?

Dynamex ABC Test Applies Borello Balancing Test Applies

Do they perform the right sort of

service?

Is the worker an established business entity,

customarily performing these sort of services?

Is the worker free from your control and direction?

Is the worker free to work with other companies and to maintain clientele, free

from restrictions?

Does the worker set their own

rates (without deduction)?

Yes

YesYes

YesNo

No

No

No No

Is the worker penalized for

rejecting clients or contracts?

Do they have

required business or contractors

license?

Yes

No

Yes

Yes

Does the worker

use their own

tools?

Do they provide

services in their own

name?

Yes Yes

No

No

No

Construction Industry Exemption

• Subcontracts must be in writing and the subcontractor must be properly licensed;

• The subcontractor must be “customarily engaged in an independently established trade”—like a carpenter, plumber, or electrician; and

• The subcontractor must be licensed by the Contractors State License Board.

Construction Industry Exemption (Continued)

• The subcontractor must maintain a business location, separate from the hiring entity;

• The subcontractor must be free to hire and fire its own workers;

• The subcontractor must assume financial responsibility for mistakes in written warranties or indemnity agreements, or as evidenced by insurance or bonds.

Construction Industry Exemption (Continued)

• Special restrictions apply with regard to subcontractors providing trucking services.

• E.g., The job must require a contractor’s license from the Contractors State License Board.

Business to Business Exemption

• Work must be performed by another business entity.

• Customarily engaged in an independently established trade;

• Have all required licenses and business tax registration.

• Maintain a business location, separate from the hiring entity.

Business to Business Exemption (Continued)

• Contract must be in writing.

• Free from control and direction.

• Negotiate its own rates.

• Set its own hours, consistent with the nature of the work.

Business to Business Exemption (Continued)

• Use own tools, vehicles and equipment;

• Advertise and market its services;

• Maintain other clients, without restrictions.

NOTE: Work requiring a license from the Contractor’s State License Board will not qualify.

Business to Business Exemption

Services must be provided directly to the contracting company, as opposed its customers!

Winners and Losers

• Its impossible to provide an exhaustive list of who is left out.

• California law requires a government license to engage in at least 177 professions.

• Only a small handful benefit from AB 5.

Winners and Losers

• Business that connects customers with a locksmith?

• Beautician working with a photographer?

• In home care companies?

• Truckers?

Winners and Losers

• Catering service companies?

• Yoga instructors?

• Gun smiths?

• Linguists?

• Home-based businesses?

Final Thoughts

Dynamex applies Retroactivity?

• California courts have held Dynamex ABC test applies retroactively.

• California Supreme Court might take this issue.

• AB 5 did not address retroactivity.

• AB 5 made its changes effective January 1, 2020.

Best Practice

If you are going to classify a worker as an independent contractor, it’s advised you seek expert advice from a trusted attorney.

• Luke Wake

• (916) 448-9904 x 15

• luke.wake@nfib.org