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How to Hire Independent Contractors and Survive in Post-AB 5 California

by | Jan 17, 2023 | New Laws |

Many of our new business clients ask, “How can I engage independent contractors after the passage of AB 5?” While Assembly Bill No. 5 (2019) (“AB 5”), and its successor, Assembly Bill No. 2257 (2020) (“AB 2257”), have certainly made it more difficult for businesses to engage independent contractor workers and service providers, it is not impossible.

AB 5 and AB 2257 implemented a new, highly restrictive worker classification test in California, the “ABC Test.”

A person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(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.

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

(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.

The biggest problem with the ABC Test is that if a business now engages an independent contractor, the work provided by the contractor must be “outside the usual course of the hiring entity’s business.” The considerable problem that results is that many California businesses have traditionally relied on legitimate independent contractors who provide services in a manner which could reasonably be construed as being within the usual course of their business. For example, a trucking company wishing to engage owner-operator truckers would be deemed to be hiring those truckers within the “usual course” of their business, regardless of all other aspects concerning the independent contractor relationship. The same would hold true for a medical staffing company providing independent contractor medical professionals to various facilities, or any number of traditional contract relationships. The examples of professions that have traditionally relied upon independent contractor services are numerous. Based on this “usual course” language, the ABC Test works to simply negate traditional worker classification standards, and makes it now seem nearly impossible to use independent contractor labor.

Fortunately, however, California businesses can in fact engage independent contractors who provide services that can be construed as within the usual course of their business, so long as the relationship fits under one of the numerous exceptions to the ABC Test in AB 5 and AB 2257.

For example, if the business operates as a “referral agency” for independent contractors to provide services to the clients of the business, or the relationship is that of “business-to-business,” and the relationship meets certain other specific requirements, then the relationship does not fall under the ABC Test, but rather must meet the traditional, more lenient Borello standard. (S. G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341 (1989).) California businesses have been able to form legitimate independent contractor relationships under the Borello-type control factors for many years.

Can your business be defined as a “referral agency” for contractor services?

  • If your independent contractor provides their own tools and supplies, is free to seek work elsewhere, sets their own hours and terms of work, is free to accept or reject rates, and free to accept or reject clients and contracts, then there is a good chance the relationship can meet the requirements of the referral agency exception of AB 5 and AB 2257. (The referral agency exception does not apply to some specified industries and professions, such as janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, etc.)

 Is your contractor relationship essentially a “business-to-business” relationship?

  • If your independent contractor maintains a business location (which may include their residence), can contract with other businesses to provide the same or similar services, advertises and holds itself out to the public as available to provide similar services, provides its own tools, can negotiate its own rates, and consistent with the nature of the work can set its own hours and location of work, then there is a good chance the relationship can meet the requirements of the business-to-business exception of AB 5 and AB 2257.

The above requirements are not exhaustive of all those which the relationship must meet, nor are the referral agency and business-to-business exceptions the only two exceptions to the ABC Test; however, we are available to determine whether your business model can work under AB 5 and AB 2257, and what may be needed to go forward in compliance with these laws.

Many times, it merely requires the creation of a solid, AB 5/AB 2257-compliant written agreement that reflects the needs of the business and some minor changes to the contract relationship to conform with current law. If the independent contractor relationship is scrutinized by the EDD, DIR-DLSE, or in a wage and hour lawsuit, we can defend the relationship through the lens of AB 5 and AB 2257, and the Borello standard. We also represent business owners in IRS worker classification audits and a federal wage and hour claims, where the federal standards are less restrictive than those of California. We have a wealth of experience in this area, having successfully defended hundreds of independent contractor relationships in both state and federal audits, investigations, and litigation.


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