Explain it! Ok. Sit back. Take a deep breathe. And follow this:
“AB 5” is 2019 Assembly Bill number 5 signed into law by Governor Newsom September 18, 2019. It became law January 1, 2020.
AB 5 voided California’s seventy-four (74) year old definition of independent contractor worker status (vs. employment worker status) by eliminating most applications of three well established CA Supreme Court cases, the last being Borello v. CA Dept. of Industrial Relations, 48 Cal. 3d 341 (1989). The “ABC” test took over most of Borello’s applicability to Labor Commissioner (for Wage and Hour regulations), Workers Compensation and Employment Development Department.
The test is relatively short: a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
- The worker 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;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Note that it deals with the worker, although the actual words used are either “person” or “individual.” But, they all mean the person who performs the services. Simply, this means if a person is performing services for a business, then ABC would test the relationship between that business and the person.
But, if a person in contract with or employed by business “X” is contracted to perform services for business “Y”, then the test logically SHOULD apply to the relationship between the person and business entity “Y”, if not “X”.
But, look at AB 5 Section 2.(e). The ABC test does not apply to a “business-to-business” contracting relationship. Then Section 2.(e)(2) indicates that “business-to-business” section “does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a ‘contracting business’.” This becomes the “business service provider.” Then Section 2.(e)(3) cites the section for “ABC” to determine whether the worker for the business service provider is an employee or independent contractor.
WHAT DOES THAT MEAN? Per “business-to-business” section, if the person who performs the work is contracted or employed by his/her own business and performs services for another “contracting business”, then independent contractor or employee status shall be determined by “Borello” — “IF” the contracting business meets twelve (12!) criteria. So, if one satisfies the twelve (12) criteria, then – not the worker – “the business entity” must then meet the Borello test. But, if the business entity fails the Borello test and the “business-to-business” section “does not apply to an individual worker, as opposed to a business entity…”, then does the “business service provider” entity become the “employee” of the “contracting business”? Or vice versa? Absurd!
And there’s more, much more!
If you own a business and contract yourself out to other businesses for contracted fees not wages — or
If you own a business and contract with other workers to contract them out to your clients for fees and pay the workers fees not wages —
Call Chris Schaefer at (415) 299-1000 or email him at chriss@caschaefer.com.
Chris has over three decades of experience dealing with independent contractor status with California EDD representing clients in more than three hundred (300) audits and appeals. Chris negotiated with EDD Lead Legal Counsel to create the regulation that was for three (3) decades the law of Silicon Valley status of independent contractor (22 CA Code of Regulations, section 4304-4; now defunct after AB 5). Chris has created or modified hundreds of business models to accommodate independent contractor status.
Chris has been rated by his peers for more than three decades through Martindale Hubbell AV. The highest rating available.
