AB-5 - California’s New Labor Law Affecting Businesses & Contractors

 By: Benjamin Jacob

The future of how people work remains subject to much debate in Congress and state legislatures across the nation. While much of today’s debate concerns hybrid work and whether workers should return to the office full-time, another important consideration is how employers classify workers. Back in January 2020, California enacted the controversial labor law known as AB-5 that dramatically redefined the test for whether workers are employees or independent contractors creating a presumption workers are employees.

Despite numerous legal challenges including one that reached the United States Supreme Court, AB-5 remains in effect as an important law that employers must remain cognizant of.

What is AB-5

AB-5 codified a strict 3-prong test known as the ABC test, under which workers are presumed to be employees unless employers can prove all three of the following conditions are met: 

1. The worker is free from control and direction in connection with the performance of the service, both under the terms of the contract as well as in fact; 

This requirement means if the employer controls the work being performed either through contract or in practice, this prong of the test will not be satisfied. 

2. The service is performed outside the usual course of the business of the employer; and

For this second requirement, the determinative question will be whether the work done by the worker is “routine and necessary” to the usual course of the employer’s business. This is perhaps the most onerous provision facing “gig” economy companies like Uber and Lyft who, for example, may have difficulty showing that drivers using their platform to provide rides is not “routine and necessary” to their business models. This, in part, explains why such companies along with others like Doordash have invested over $90 million in a ballot initiative campaign seeking to carve out an exemption for their businesses.     

3. The worker is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.  

This requirement means the worker should have their own business regularly doing the work they’re performing for the employer. Here, the Labor Board and courts will examine whether the worker has other clients, uses independent marketing materials, holds a business license and other attributes characteristic of an independent business.

Exemptions

AB-5 carves out exemptions for certain types of workers. It is critical to understand that the exemption does not immediately render the worker as an employee. Below, we’ve highlighted a non-exhaustive list of some of the exemptions and requirements to qualify for the exemptions. 

Workers holding professional or occupational licenses: (Licensed professionals exemption)

• Direct sales personnel (cannot be paid hourly and must have written contract agreements)

• Physicians, surgeons, dentists, veterinarians

• Lawyers

• Accountants

• Registered securities broker-dealers and investment advisers

Workers providing professional services (Professional Services exemption)

• Criteria 

  • Must pass the Borello test and satisfy a 6 factor test

  • Types of professional services:

    • Marketing professionals, Graphic designers,HR administrators

Business to Business Contractors (B2B exemption)

• The business, which can include individuals operating as sole proprietors, must satisfy the Borello test and additional criteria.

If you have questions on how AB-5 may affect your business, please contact an attorney at Fourscore Business Law.

Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, the Southeast and the Bay Area. We also represent venture capital funds and other investors who invest in companies located in New York, Silicon Valley and everywhere between. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.