Just when you thought the laws defining who is an employee and who is an independent contractor (IC) couldn’t get more confusing, along comes Labor Code Section 2750.3, which took effect January 1, 2020. That law, essentially the codification of the famous Dynamex case from 2018, completely changes the landscape for independent contractors in California; and not in a good way, generally. The legislation, although effective January 1, but essentially retroactive, is designed to correct perceived inequities for Uber and Lyft drivers and other workers who have little or no bargaining power.
The ABC test is now the law of the land, and an IC must satisfy all 3:
A – Does the worker control what they do
B – Does the worker perform work that is distinction from the regular business of the hiring entity;
C – Does the work have a business distinct from the hiring entity
If an IC fails the test, there may be an exemption under various subparts to the new law. The lobbyists who screamed the loudest (e.g., lawyers, doctors), remain exempt from the law and only have to satisfy an older, less stringent employee-versus-independent contractor test previously used by the state’s agencies (the “Borello” Test). A few other “professional relationship” categories have been established to carve out certain other workers as exempt from the law, such as grant writers, marketers and human resource consultants, but in the Department of Unintended Consequences, consider the following:
A psychologist is exempt from being classified as an employee under the new law, but a psychotherapist is not.
Physical therapists and occupational therapists who take assignments from a business working directly with home care agencies have always considered themselves freelancers. No longer. They will need to be employees.
If Charles Schultz were still drawing Peanuts and submitted more than 35 cartoons to the LA Times in a single year, he would have to be employed by the newspaper. Same with photographers who submit more than 35 images in a year.
Court reporters who typically freelance and control when and where they work can no longer be independent if they work through an agency.
Upscale hair salons can no longer process credit cards for their patrons on behalf of their otherwise independent stylists who rent their stations. Nor can they schedule appointments at a central front desk, even if the stylists have separate calendars at that desk.
Manicurists, but not stylists, will be forced to be employees in 2022, regardless of their otherwise independent existence (i.e., renting a chair).
If you don’t fall into the law’s exempt “professions” or in an exempt “professional relationship” category, a worker could still qualify as an IC if the IC satisfies several criteria for a “bona fide business-to-business relationship.” The “service provider,” that alleged independent contractor, must provide services directly to their contracting entity and not to the customers or clients of that entity. For example, even if the physical therapist could otherwise qualify as an independent contractor, that therapist would now be classified as an employee because he or she is providing services to the client/customer/patient and not to the contracted agency — a direct violation of one key prong of the “bona fide business-to-business” exemption.
I feel some amendments coming … until then, expect plenty of legal challenges (already filed by trucking organizations and others) and head-scratching.
Jonathan Fraser Light is the managing attorney at LightGabler and has over 30 years’ of experience in management-side employment consulting and litigation. He may be reached at firstname.lastname@example.org.
From the FCIS Team
Are you wondering how this will impact your Workers’ Comp policy?
Assembly Bill 5 (“AB 5”), signed by Governor Newsom last year, takes effect for workers’ compensation on July 1, 2020. It’s important to note, as Jonathan outlined above, that AB 5 defines a new “ABC” test that changes the criteria used to determine whether, by law, a person who performs work for you is an employee or an independent contractor for insurance, tax and all legal purposes. Depending on your industry and the number of employees and freelancers you have/use, you may face significant changes in how you structure your payroll.
For example, if you believe your workers are independent contractors rather than employees, but it is later determined under the new criteria they are employees based on the new Labor Code, Worker’s Compensation Insurers will now include their compensation when calculating your final premium beginning July 1, 2020. As a result, you may be looking at an increase in the final cost of your policy.
To avoid surprises or unexpected increases when your workers’ comp policy is audited, it will be vital to ensure that all payroll is included as of July 1, 2020 for all employees as defined by the new “ABC Test” and statutory law.
You can visit the California Department of Industrial Relations website at https://www.dir.ca.gov/dlse or call their toll-free Customer Service Center at 1-844-LABOR-DIR (1-844-522-6734). Additional resources and FAQs can also be referenced via the California Labor and Workforce Development Agency’s website at https://www.labor.ca.gov/employmentstatus/.
For more information on how this may impact your policy, connect with someone from our FCIS team today.