By Eric D. Morton
Beginning this year, California has introduced new laws affecting many industries. The new law regarding independent contractors, Assembly Bill 5 (“AB 5”), is one of the most far reaching, touching many small and medium size businesses as well as companies like Lyft and Uber. AB 5 went into effect on January 1st and is now codified in Labor Code Section 2750.3. We are urging our clients to review the status of their workers or employees under this law.
The origins of the new law grew from a California Supreme Court case decided last year. The Court issued a decision that clarified how to classify workers as either employees or independent contractors in the case of Dynamex Operations West, Inc. v. Superior Court. The court’s decision was limited in its context, however, which resulted in different conflicting standards for how to apply the classification. As a result, the state legislature decided to make the Dynamex standard uniform and passed AB 5.
The first part of Section 2750.3 states:
(a) (1) For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, 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.
Notice the phrase “unless the hiring entity demonstrates.” The business hiring a worker has the burden of proving that the worker is an independent contractor and not an employee.
In hiring an independent contractor, the best practice is to execute a contract with the contractor that documents the project for which the contractor is hired and the conditions for which the contractor does the work, the amount and terms of payment. Of course, the business should ensure that the worker is actually an independent contractor given the context of their work.
Many businesses are over-reacting to AB 5 by requiring that their independent contractors own corporations or limited liability companies. This is unnecessary and won’t withstand scrutiny if done solely for AB 5 purposes. The law looks at the individual doing the work and the circumstance of the individual’s work, not whether or not the individual owns a business entity. If your receptionist owns a corporation, and you pay that corporation, but the receptionist must come to work on your premises and work 8 to 5, the receptionist is still an employee.
I’ve advised my clients to review their independent contractors to determine if they truly meet the criteria. If workers are independent contractors, then write clear contracts with those contractors that clearly define their work, compensation, and status. Consult with an attorney in case of any contractor whose status seems unclear.
Eric D. Morton, is the principal attorney at Clear Sky Law Group. He can be reached by at 760-722-6582, 510-556-0367, or firstname.lastname@example.org.