Learn about the new California independent contractor law, Assembly Bill 5

Paul Sethi
Paul Sethi is the founder and president of Cognizant HR and Tax in the Inland Empire, serving small businesses with their human resource needs like payroll, compliance audits, employee handbooks, investigations, training, taxes and more. He brings over 10 years in the field and is SHRM certified professional with an MBA. Courtesy photo

Assembly Bill 5 is the most widely reported bill of 2019 and will be discussed for many years to come.  This bill was signed into the law in September 2019 and went into effect this month.  It clarifies the “ABC” test for employers as a standard for classifying the workers as an employee, who is issued a W-2, or as an independent contractor, who receives a Form 1099. The burden of proof is on the employers to demonstrate the worker can be classified as an independent contractor. To demonstrate this burden of proof, employers must abide by all the conditions stated in “ABC” test, as per Dynamex vs State of CA, April 30, 2018.

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.

If an employer expects an independent contractor to show up to work certain times, controls what they are being paid and how they do their work must reclassify them as an employee. A prime example would be Uber drivers, who do not know where the ride is going, do not control what they are paid per ride, do not set their rates and thus must be classified as employees. Uber has much of the control via the app.

B – The person performs work that is outside the usual course of the hiring entity’s business.

A prime example would be a florist that hires a floral designer to make bouquets, which is the core business of the florist and issues them a Form 1099, but treats them as employee. This business owner must reclassify the floral designer as an employee and comply to Fair Labor and Standards Act, file payroll taxes and must have workers’ compensation coverage.

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.

Under this test, the worker must be an independent business entity that provides similar services to many businesses, and not just to one business, is licensed to do that trade and has proper insurances in place for potential liability. A prime example would be an insurance office hiring an information technology professional who provides services to several clients for many IT-related issues.

Many small-business owners have misclassified their workers as independent contractors as it saves them potentially 20-25% of the labor cost by avoiding the payroll taxes, workers’ compensation insurance and benefits to employees under the current federal and state labor laws. The long-standing labor laws protect workers by providing them with rest and meal breaks, protections under FLSA and workers’ compensation laws.

Some professions are exempt from this law, and these are licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services and others performing work under a contract for professional services, with another business entity or pursuant to a subcontract in the construction industry. To qualify for this exemption, independent contractors’s and business owners must prove that independent contractor’s set their own hours, pricing and how they conduct their business without control from others, including the business owners.

Paul Sethi is the president of Cognizant HR and Tax serving small businesses with their human resource needs like payroll, compliance audits, employee handbooks, investigations, training, taxes and more. He brings over 15 years in human resource field and is SHRM certified professional with MBA. Sethi is not an attorney, and this article is not meant to be legal advice or notice. Sethi can be reached via email at cognizant.hr.tax@gmail.com.