Employment Law: a Deep Dive Into Ab 5

• Publication year: 2019
• Author: By Kathleen A. Brewer

Employment Law: A Deep Dive Into AB 5

By Kathleen A. Brewer

What Do Physicians, Architects, Manicurists, Attorneys, Photographers, Cartoonists, Dentists and Dog Walkers Have in Common? Determining Their Status as Employees or Independent Contractors Is Not as Easy as A-B-C. In 2019, the California Legislature tackled the thorny job of deciding how to determine when a worker is an independent contractor rather than an employee. Assembly Bill 5,¹ introduced by Assemblymember Lorena Gonzalez as a measure to protect exploited workers, served as the lawmakers' canvas. Initially, the bill embraced a simple test for determining independent contractor status and subjected nearly all employment relationships to that test. Industries reliant on independent contractors clamored for exceptions. The result? A bill cluttered with occupation-specific exemptions and labyrinthian tests that, although unwieldy, does provide vital statutory guidance. Because of its complex approach to determining independent contractor status, AB 5, which became law on January 1, 2020, warrants a detailed examination.

The ABC Test - Labor Code section 2750.3, subdivision (a)

AB 5 began as an effort to codify the California Supreme Court's decision in Dynamex Operations West, Inc. v. Superior Court.² The Dynamex court adopted a simple "ABC" test for determining whether a worker is an employee or an independent contractor. Under the ABC test, as now codified in Labor Code section 2750.3, subdivision (a), "a person providing labor or services for remuneration is presumptively an employee rather than an independent contractor unless the hiring entity demonstrates that the worker:

(A) 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) performs work that is outside the usual course of the hiring entity's business, and
(C) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.³

"The ABC test is conjunctive, and the hiring entity's failure to establish any of the [ ] three factors precludes a finding that the worker is an independent contractor."⁴ AB 5 expanded the ABC test beyond the Dynamex holding, which applied only to cases brought under the Industrial Welfare Commission (IWC) Wage Orders, to claims arising under the Labor Code and the Unemployment Insurance Code.

Double Standard: Embracing Both Dynamex and Borello

The earliest version of AB 5⁵ contained exceptions for licensed insurance brokers, licensed physicians and surgeons, registered securities brokers and investment advisors, and direct salespersons.⁶ Codification of the ABC test for all but a handful of excepted workers would have been a tidy break from the more cumbersome "all circumstances" test adopted by the 1989 case, S.G. Borello & Sons, Inc. v. Department of Indus. Relations.⁷ However, the legislative evolution of AB 5 produced exceptions so numerous as to fundamentally alter the original codification effort. The resulting statute adopts two "tests" for determining independent contractor status. The ABC test, which establishes both a presumption of employee status⁸ and a simple set of factors for finding otherwise, is the default analysis that applies generally to workers who bring wage and hour claims. The multifactor Borello test applies to claims involving the professions that section 2750.3 exempts from the ABC test.

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The Borello "Test"

Understanding Borello is critical because the Legislature has now adopted Borello as the governing standard for a number of specified professions. Unlike its codification of the ABC test, which incorporates the test's factors into section 2750.3, the Legislature adopted the Borello standard by stating the independent contractor determination "shall be governed by Borello."⁹ Comprehending and applying the Borello "test" is not as simple as A-B-C. In fact, Borello did not establish a test, or even a standard, for determining a worker's status.¹⁰ Rather than adopting a test, the Borello court announced two governing principles and approved a number of factors that may be considered in light of those principles.

Under Borello's first governing principle, independent contractor determination must be made with deference to the fundamental purposes of the statute invoked by the worker. As the court in Dynamex noted, "although we have sometimes characterized Borello as embodying the common law test or standard for distinguishing employees and independent contractors [citation], it appears more precise to describe Borello as calling for...application of a statutory purpose standard that considers the control of details and other potentially relevant factors identified in prior California and out-of-state cases..."¹¹ Borello's second governing principle requires courts to consider all relevant factors—"all the circumstances"—when making the determination.¹²

Although Borello did not adopt a particular set of indicia that must be considered when making the status determination, it did list with approval a number of existing multifactor tests. The factors comprising those tests are now generally considered "Borello factors" and include, first and foremost, the "right to control the work." "Under Borello, '[t]he principal test of an employment relationship [is] whether the person to whom service is rendered ha[d] the right to control the manner and means of accomplishing the result desired.'"¹³ The additional factors include:

1. whether the one performing services is engaged in a distinct occupation or business;
2. the kind of occupation, with reference to whether the work is usually done under the direction of the principal or by a specialist without supervision;
3. the skill required in the particular occupation;
4. whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
5. the length of time for which the services are to be performed;
6. the method of payment, whether by the time or by the job;
7. whether or not the work is a part of the regular business of the principal;
8. whether or not the parties believe they are creating the relationship of employer-employee.
9. the worker's opportunity for profit or loss depending on managerial skill;
10. the worker's investment in equipment or materials required for his task;
11. whether the service rendered requires a special skill;
12. the degree of permanence of the working relationship;
13. whether the service rendered is an integral part of the alleged employer's business.

When determining independent contractor status under Borello, as now required by Labor Code section 2750.3 for numerous professions, the analysis must include consideration of the "Borello factors" in light of the relevant statute's underlying purposes.

The Borello Professions

Labor Code section 2750.3, subdivisions (b), (c), (e), (f), (g) and (h) specify the professions that are subject to Borello rather than the ABC test. The carve-out includes a straightforward list of fifteen professions that are excepted from application of Dynamex as well as other occupations for which the exception requires a threshold showing.

Fifteen Clear Exemptions

Under section 2750.3, subdivision (b), determination of independent contractor status for the following occupations is governed by Borello, not the ABC test:¹⁴

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• certain insurance brokers and agents
• physicians and surgeons
• dentists
• podiatrists
• psychologists
• veterinarians
• attorneys
• architects
• engineers
• private investigators
• accountants
• securities broker-dealers and investment advisors (and their agents)
• direct salespeople who deal in real estate, mineral, oil and gas, cemetery services or yacht sales and meet the conditions set forth in Unemployment Insurance Code section 650
• commercial fishermen working on American ves-sels¹⁵
• newspaper distributors.¹⁶

"Professional Services" Providers

Under section 2750.3, subdivision (c), Borello governs the independent contractor determination for individuals who perform "professional services" as long as (a) the service provided meets the statutory definition of a "professional service," and (b) the individual satisfies a set of five threshold requirements.¹⁷ As to the first factor, the exception applies only to the following types of professionals:¹⁸

• marketing professionals (as long as the work is "original and creative in character")
• human resources administrators (if the work is "predominantly intellectual and varied in character")
• travel agents (if regulated by the Attorney General or an individual seller exempt from registration)
• graphic designers
• grant writers
• fine artists
• enrolled agents (licensed to practice before the Internal Revenue Service)
• payment processing agents
• still photographers and photo journalists (who do not license content submissions to the hiring entity more than 35 times per year and excluding individuals who "work on motion pictures")
• freelance writers, editors, and newspaper cartoonists (who do not provide content submissions to the hiring entity more than 35 times per year).
• licensed estheticians, electrologists, manicurists, barbers, and cosmetologists.¹⁹

As to the second factor, the individual providing the professional service must:

• Maintain a business location, which may be the individual's residence, separate from the hiring entity's location.²⁰
• Have a business license, in addition to any required professional licenses or permits.²¹
• Have the ability to set or negotiate rates for the services performed.
• Have the ability to set his or her own hours (other than project completion dates and reasonable business hours).
• Be customarily engaged in the same type of work for other hiring entities or holds himself/herself out as available to perform the same type of work.
• Customarily and regularly exercise discretion and independent judgment in the performance of the services.

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