Editor’s note; This article is the first in a four-part series explaining the new gig worker law, Assembly Bill 5. In part one, we will explain AB 5 and take a brief look at each of three tests used to determine the classification of employees and independent contractors. In the upcoming installments of this series, Valley News will explain the Borello Test and the ABC Test in full as well as what independent contractors can do to help them retain their gig worker status.
A new law took effect Jan. 1, setting requirements to clarify which employees are independent contractors, or gig workers and which are employees. Assembly Bill 5 has raised many questions from employers and those who for years have worked as independent contractors, so in an effort to clear the muddy waters regarding this complicated and not clearly defined law, Valley News took an online course with lawyer Kiffanie Stahle who specializes in gig workers, specifically designed to answer some of the more difficult to understand portions of the law.
While this article serves to inform readers, it is important to note that employers and independent contractors should retain legal counsel if there are questions of concerns regarding AB 5 for their specific business.
What is AB 5?
AB 5 is legislation written by San Diego Assemblymember Lorena Gonzalez and codifies into law the Supreme Court of California case, Dynamex Operations West Inc. v. The Superior Court of Los Angeles County. The law states that most workers are employees and ought to be classified as such, placing the burden of proof for classifying individuals as independent contractors on the hiring entity.
The big benefit to AB 5 is that it entitles workers classified as employees to greater labor protections, such as minimum wage laws, sick leave, and unemployment and workers’ compensation benefits, which do not apply to independent contractors.
Bill opponents raised concerns that rather than hiring those misclassified as independent contractors under the new law most hiring entities would stop using those workers all together citing an up to 30% increase in labor costs which in turn would be passed on to consumers in the form of higher costs for customers. Opponents also expressed concern for reduced flexibility for workers who prefer the freedom gig working provides as well as the ability to earn a living without being forced to work a 9 to 5 job.
Gov. Gavin Newsom signed AB 5 into law Sept. 18, 2019.
What AB 5 does
AB 5 requires companies that hire independent contractors to reclassify them as employees, with a few exceptions. More than 50 professions and types of businesses are exempt from the law, including insurance agents, attorneys, real estate agents and certain types of business-to-business contractors and referral agencies. Companies that are not exempt will have to take a closer look at how they classify employees and independent contractors to ensure that they’re not violating the terms of the bill.
Determine the worker’s status
Under AB 5 employers should look at one very specific question. Who is in control? If the hiring entity is in control, that gig worker is actually an employee. If the gig worker is in control, then under the new law, they “might be” an independent contractor.
Once the employer has answered the initial question of control and determined the employee might be an independent contractor, then one of three tests should be used to determine the status of the worker.
Use the IRS test
The first test is the IRS test. This test is used for any employees outside of California for the employer to determine if they are an employee or an independent contractor, but employers can only use this test if they don’t have a California-based team member performing the same role.
The IRS test focuses on three specific areas: does the hiring party have the right to direct and control how the worker is performed, does the hiring party have control over the financial and business aspects of the work and what kind of relationship does the worker most resemble? If the employer determines that any one of the three areas is not met, then the worker is an employee.
Apply the Borello Test
As with all the tests, the Borello Test operates on the presumption that all workers are employees. Employers can use this test to prove that the worker is not an employee but rather an independent contractor. The Borello Test uses several factors to determine if the hiring party has control over the work that is being performed.
The Borello Test looks at whether or not the worker holds themselves as a business owner distinct from the hiring party, whether or not that worker is an integral part of the hiring party’s business, who provides the location, supplies tools and equipment, is the work done without supervision or direction, does the worker have the opportunity to make a profit or loss in performing the work, how long the relationship will last and if the relationship is permanent, how the worker is paid, whether or not the worker can hire others, how the relationship between the worker and the hiring entity ends and what kind of relationship the parties intend to create.
Once the employer has the answers to each of these questions, they must weigh them to decide if the hiring party can prove that the relationship is actually an independent contractor.
Study the ABC Test
The ABC Test, also known as the Dynamex Test, also starts with the assumption the team member is an employee.
The ABC test looks at three very specific areas:
A. Is the worker free from the control and direction of the hiring party in performing the work, both as outlined in the contract and as the work is executed?
B. Is the work done outside of the work that is usually performed by the hiring party’s business.
C. Does the worker offer her services to others as part of her own business?
If the hiring party can prove all three elements of the test are met, the hiring party can label that worker as an independent contractor.
Misclassifying an employee
Misclassifying an employee as an independent contractor can prove to be expensive if a business is caught doing so. A single month can easily lead to upward of $10,000 in fines and penalties. According to Stahle, there is one penalty alone that ranges from $5,000 to $25,000. Some of the fines and penalties include failure to pay minimum wage, failure to pay overtime, failure to pay for missed meal periods, failure to pay for missed rest periods, failure to reimburse business expenses, failure to provide accurate and itemized pay stubs and failure to pay on each payday.
Kim Harris can be reached by email at email@example.com.