The ABCs of AB5
Earlier this month, a California judge ordered Lyft and Uber to reclassify their workers while the litigation over the companies’ compliance with Assembly Bill No. 5 (AB5), A.K.A. “the gig workers bill,” continues. The order comes after more than a year of Lyft and Uber refusing to classify their drivers as employees under the new state law.
AB5 is a California law, passed last year that created a new test for classifying workers either as independent contractors or employees. For employers, the difference in classification is about a 30 percent cost difference on the payroll because of increased contributions to unemployment and workers’ compensation insurance as well as wage and hour laws.
With more states following California’s lead, companies that typically 1099 most of their workforce are going to have to either adapt their processes to avoid misclassifications or treat their independent contractors as company employees to avoid potential liabilities like unpaid wage claims and ACA compliance.
This article explains AB5’s ABC test and its exemptions, future posts will discuss the business-to-business (B2B) exemption to the ABC test and the basic hiring requirements for employers who find themselves adding new (perhaps temporary) employees because of this new classification law.
The ABC Test
Under AB5, a California worker is presumed to be an employee of a business unless that business can show the worker satisfies a three-factor test, known as the ABC test (A.K.A the Dynamex test, after the landmark state supreme court case that created the test):
The worker is free from control and direction in the performance of services.
First, a contract between an employer and a worker referring to the worker as an employee is not enough (neither is the year-end tax form). Under AB5, a court or agency will look at the duties and obligations of a contract and the facts of the employer-worker relationship to determine whether the employer has or is exerting control over the worker.
Second, to have (or exert) sufficient enough control to classify a worker as an employee, an employer must dictate the way in which the worker completes the work. A court or agency will look at the employer’s timeline for the work, who provides the workers’ tools, and the methods used to complete the work; however, the dispositive feature of this factor is how hands-off the employer is with the worker’s work.
For example, an employer who hands a worker a task and deadline and then allows the workers to complete the task in the worker’s own method is likely establishing an independent contractor relationship.
Though the first factor in this three-part test, California courts will end with this fact-intensive analysis; therefore, employers who argue against an employee classification will need to begin with factors B and C.
The worker is performing work outside the usual course of business of the hiring company.
This factor assesses how different the worker’s work is from the employer’s business. If a worker is performing similar work as an employer’s employee, then a court will likely find that worker to be an employee.
For example, if a studio has a sound engineer on staff but then contracts a freelancer to record some tracks, then that freelancer will likely be classified as an employee under this factor. On the other hand, the studio’s contracted CPA (or plumber, electrician, lawyer, etc.) is likely not an employee of the studio because their work is outside the usual course of the studio’s business (i.e. game design).
The worker is customarily engaged in an independently established trade, occupation, or business.
The last factor can be met if the contractor has an established operation before the working relationship is established. That includes taking steps like incorporation, licensure, and marketing to the general public.
In the last example, if the freelancer incorporated or filed as a sole proprietor and is advertising their services to multiple studios, then they would likely be an independent contractor under this factor.
While seemingly daunting to most employers, there are a few employer exemptions that could save a business the headache of reclassification – the Borello exempt workers exemption, discussed below, and the B2B exemption, discussed in a follow-up post.
Exempt Workers – The Borello Plus Test
AB5 exempts certain types of workers from the “employee” designation, so long as they meet specific criteria. For the games industry, many of the independent contractors may likely fall into the professional services exemption (i.e. graphic designers and marketing professionals). To be in that exception, a worker must pass the pre-Dynamex test (Borello) plus an additional six factors. The eleven Borello factors are:
- Whether the worker is engaged in an occupation or business that is distinct from that of the hiring firm;
- Whether the work is part of the hiring firm’s regular business;
- Whether the hiring firm or the worker supplies the equipment, tools, and the place for the person doing the work;
- The worker’s financial investment in the equipment or materials required to perform the work;
- The skill required in the particular occupation;
- The kind of occupation—whether, in the locality, the work is usually done under the hiring firm’s direction or by a specialist without supervision;
- The worker’s opportunity for profit or loss depending on his or her own managerial skill;
- How long the services are to be performed;
- The degree of permanence of the working relationship;
- The payment method, whether by time or by the job; and
- Whether the parties believe they are creating an employer/employee relationship.
The six additional factors are that the worker:
- maintains a business location separate from the hiring firm—this may include their residence;
- has a business license, in addition to any required professional licenses or permits;
- is able to set or negotiate their own rates for the services performed;
- is able to set their own hours;
- (a) is customarily engaged in the same type of work under contract with another hiring firm, or (b) holds themselves out to other potential customers as available to perform the same type of work; and
- customarily and regularly exercises discretion and independent judgment performing their services.
For more information on worker classification under AB5, contact Odin Law & Media here.