Good morning, everybody, and welcome to Episode #14 of the #ThinkLikeALawyer Small Business Law Podcast. My name is Bradley Bailyn, and I am a small business lawyer here in New York City. Today, we’re going to be talking about a new law that passed in California and goes into effect on January 1st, 2020. It’s known as AB-5 and it formally enacts as legislation a test of independent contractor versus employee status which previously had only existed in case law.

The ABC Test For Independent Contractor Vs. Employee Status

The independent contractor test in California, which will be formally adopted as of January 1st, 2020, uses something known as the ABC test, which is a very strict test and will usually find that the person doing the work for you is an employee and not an independent contractor.

Part A of the test requires that the work that the person is doing is free from the direction and control of the hiring entity. Both, in fact and in law. So that basically means that you are allowed to specify that they need to work during reasonable business hours and you can specify generally what they’re going to do. But beyond those things, you really can’t do much else. They really have to have very substantial latitude in what they’re doing.

Part B of the test requires that the worker is doing work which is not the typical work which is performed by your company. So in other words, if you have a professional marketing company and the independent contractor is doing marketing for you, then unless one of the exceptions applies, then this person is going to be considered an employee because they are doing the same kind of work that you do under part B of this test.

Part C of the test requires that the worker is engaged in an independently established business or trade. And when they are working for you, they’re doing the same kind of work that their business has been established to provide. Part C of the test requires that they have an independently established business, trade or occupation, which does the same type of work that you have in fact hired them to do. So in other words, if they’re an accountant by trade and they have an accounting business, but they’re writing articles for you about accounting and you have a writing company, then there is a strong argument that it doesn’t really matter the fact that they’re an accountant because in this case they are violating Part C of the three part test.

What Are The Exceptions To The ABC Test?

So with that being said, the next question is what are the exceptions to the ABC test? There are two situations that need to be considered here. The first situation is when you are hiring an individual person either directly or through a business entity that they operate. And the second circumstance, when you’re hiring an established company in the B2B space.

Exceptions For Individual Freelancers

Let’s talk first about the more common scenario where you’ve just got somebody in California writing articles for you or doing web design for you or something to that effect. Maybe they’ve got their own corporation or LLC. It makes no difference, the way that this law is stated. So to qualify for one of these exceptions, they have to be providing one of the specifically enumerated professional services in the creative space. The professional services which are going to be relevant are as follows: Marketing, H.R. Admin, Grant Writing, Graphic Design and Freelance Writing or Journalism services.

Now freelance writing or journalism services has a relatively lengthy set of limitations attached to it. And in fact, this is currently subject of litigation by at least one journalism organization raising the argument, “Why are we being singled out to have our ability to make a living capped?” Basically, if you’re hiring a freelance writer, they cannot make more than 35 submissions per year or they’re going to be considered an employee.

The important thing to note here is that professional services requires that the person is creating a work product which is not just grunt work, but reflects substantial creative abilities. And that’s not directly from the law. That’s just me making shorter a more lengthy description from the law. But the point of this is going to be, regardless of what exception is qualified for or not qualified for, that they’re actually producing an intellectual work product. If the person is just processing 200 images and not producing anything of a unique intellectual value, then it is not going to be considered professional services notwithstanding anything else that you may find elsewhere.

Exceptions For B2B Service Providers

Now, the next thing we’re going to talk about is a situation where you hire a company to provide you with B2B services. In such a situation, the ABC test is not going to apply as long as all of the following circumstances are fulfilled.

You’re going to need to have a copy of this (AB-5) to make sure that you’re getting this right. I’ve got a copy of AB-5 here. Or better, consult with a competent attorney… either me or somebody else to make sure that you’re not going to get yourself in a lot of trouble here.

  1. First.The business service provider must be free of the control and direction of the hiring agency to the same extent we discussed earlier when we talked about the case of individuals.
  2. Second.The business that you’re hiring must be providing the services directly to your company and not to your customers or clients.
  3. Third. Your contract with the company you’re hiring must be in writing.
  4. Fourth. If the work that they are performing is being done in a jurisdiction that requires some kind of a license or permit, that they do actually have that license or permit.
  5. They must have a business location which is separate from your location.
  6. The business typically does the kind of work for other customers that you’ve hired them to do for you. In other words, they are customarily engaged in that same line of work that you’re hiring them to do for you.
  7. The business has customers other than your company. This is a relatively universal requirements.
  8. The business advertises and holds itself out to the general public as providing similar services for other companies to the services that you are hiring them to provide for you.
  9. The company that is going to do the work has its own tools, equipment, etc. to do it. They’re not relying on using yours.
  10. They have a real honest ability to independently negotiate their own rates with you.
  11. Consistent with the type of work that’s being done, they have the ability to set their own hours and work location.
  12. The business service provider is not performing the type of work for which a license from the Contractor State License Board is required.

So there is case law dealing with many different types of circumstances, and this is certainly not a clear area of law and it represents a very substantial risk to anyone who is using workers in California, because this is, in my opinion, among other things, a revenue-generating law. And they’re going to do everything within their power to generate as much revenue as possible.

My name is Bradley Bailyn. If you have questions, thoughts, comments, etc. please give me a call. Don’t forget to subscribe to this Vlog and connect with me – if you’re interested in doing that.

And as my standard disclaimer: You should not rely on anything that you hear in a video, mine or anyone else’s, or that you read online when making critical decisions like this. And you should consult with a competent attorney who will analyze your individual factual situation and give you hopefully excellent advice. I cannot be held liable if you rely on this video which is only general information.