Assembly Bill No. 5

Assembly Bill No. 5 1500 993 BERNSTEIN FINANCIAL SERVICES 2019

The “Independent Contractors” (IC) issue has been a sticky issue for contractors and developers for a long time.  There are rules related to IC’s that originate with a contractor’s license, another set of rules that the State of California uses, and finally, a third set of rules utilized by the Federal Government (the IRS).

The rules dictated by a contractor’s license and the IRS have not changed in any substantial way, but the State of California did make changes that will be effective on 1/1/2020.  Some of the reasons for these changes are stated in the Bill:

Section 1 (b): “In its decision, the court cited the harm to misclassified workers who lose significant workplace protections, the unfairness to the employers who must compete with companies that misclassify, and the loss to the state of needed revenue from companies that use misclassification to avoid obligations such as payment of payroll taxes, payment of premiums for workers’ compensation, Social Security, unemployment, disability insurance.”

Section 1 (c): “The misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise in income inequality.”

As stated in AB5, some important excerpts from the Bill are:

“Existing law, as established in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex), creates a presumption that a worker who performs services for a hirer is an employee for purposes of claims for wages and benefits arising under wage orders issued b the Industrial Welfare Commission.  Existing law requires a 3-part test, commonly known as the “ABC” test, to establish that a worker is an independent contractor for those purposes.”

Sec 2 2750.3 (a) (1) indicates, “For purposes of the provisions of this code and the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

  1. (A)The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. (B)The person performs work that is outside the usual course of the hiring entity’s business.
  3. (C)The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

Following these three conditions, AB-5 lists many clarifying paragraphs (including exceptions.)

Classification as employee or independent contractor of contracted professional services will instead by governed by the Borello case.  This case is older and concentrates on many conditions, most of which revolve around “control” issues.

Please review your IC’s and employee statuses to be sure you are following the law properly.  Refer to the actual AB-5 Worker Status law for additional details.