AB 5’s ABC Test explained

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Editor’s note; This article is the third in a four-part series explaining the new gig worker law, Assembly Bill 5. 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 aspects of the law. In part one, we explained AB 5 and took a brief look at each of three tests used to determine the classification of employees and independent contractors. In this installment, Valley News will explain the ABC Test in full and what gig workers and employers can do to retain independent contractor status.

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 Assembly Bill 5 for their specific business.

What is AB 5?

AB 5, which took effect Jan. 1, is legislation written by San Diego Assemblymember Lorena Gonzalez and codified into law the Supreme Court of California case, Dynamex Operations West Inc. v. The Superior Court of Los Angeles County. The law requires companies that hire independent contractors to reclassify them as employees, with a few exceptions, including insurance agents, attorneys, real estate agents and certain types of business-to-business contractors and referral agencies.

Companies that are not exempt must take a closer look at how they classify employees and independent contractors to ensure that they’re not violating the terms of the law.

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, the 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, the IRS test, the Borello Test or the ABC Test should be used to determine the status of the worker. In this article, Valley News will explain the Borello Test and how to apply it to determine if workers are employees or independent contractors

Apply the ABC Test

As with all the tests, the ABC Test operates on the presumption that all workers are employees. The ABC Test should be used for all California-based team members who don’t qualify for the Borello Test to determine whether a worker is an independent contractor or employee. For more on the Borello Test, visit www.myvalleynews.com.

Unlike the Borello Test which has 12 criteria that must be met, only three elements must be met under the ABC Test for a worker to be classified as an independent contractor.

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 their services to others as part of their own business?

And if a business can’t prove all three elements are met, the team member must be called an employee.

A note on 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 valleyeditor@reedermedia.com.