New Law Adds Independent Contractor, Freelance Exemptions to AB 5

A new law has come to the rescue of a number of freelance professions by exempting them from the onerous requirements of AB 5, which required most independent contractors to be classified as employees in California.

Governor Gavin Newsom on Sept. 1 signed AB 2257 as an urgency measure, so that it took effect immediately after it passed unanimously in both houses of the state Legislature.

If you remember, AB 5 set a new standard for hiring independent contractors, requiring many to be reclassified as employees covered by minimum wage, overtime, workers’ compensation, unemployment and disability insurance. It created a three-pronged test that needs to be satisfied to determine if someone is an independent contractor or an employee.

To be independent contractors under AB 5’s “ABC test,” workers must (A) work independently, (B) do work that is different from what the business does, and (C) offer their work to other businesses or the public. All three conditions must be met.

It is prong B that’s problematic, as for example, a freelance writer working for a publication would not be doing something different than the business does. The law sets limits on the amount of income someone can receive while doing this kind of work before being considered an employee.

 

Exemptions under new law

AB 2257 preserves the ABC test for independent contractor classification but adds a number of exemptions from this test. Here are the professions now exempt from AB 5, meaning that they can be considered independent contractors and not have to be treated as employees under the law:

  • Youth sports coaches
  • Specialized performers
  • Home inspectors
  • Insurance industry field service contractors
  • Appraisers
  • Underwriting inspectors
  • Premium auditors
  • Risk management, or loss control specialists
  • Sports competition judges, umpires and referees
  • Graphic design
  • Web design
  • Tutoring
  • Consulting
  • Caddying
  • Wedding planning and event vending
  • Yard cleanup
  • Captioning, and
  • Interpreting and translating services.

AB 5 also has a freelancer exemption, which has been expanded by the new law to include:

  • Fine artists
  • Freelance writers
  • Translators
  • Editors and content contributors
  • Advisors, narrators, cartographers, producers and copy editors, and
  • Illustrators, and newspaper cartoonists working under written contracts.

AB 2257 also expands the “business-to-business” definition in AB 5 to cover a relationship between two or more sole proprietors.

Controversial Law Suffers Early Legal Setbacks

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California’s controversial independent contractor law suffered its first two legal setbacks in January after trucking firms and independent truckers were able beat back at the new law in court.

On Jan. 8, a Los Angeles County Superior Court judge ruled that AB 5 does not apply to independent truckers because they are covered by federal law.

And on Jan. 13, a federal judge extended a restraining order for the law to cover truckers as of Jan. 1 this year in a case brought by the California Trucking Association, seeking a preliminary or permanent injunction on the new law.

Since it was signed into law, AB 5, which took effect Jan. 1, has been highly controversial. It was mainly written in response to the gig-worker economy and targets companies like Uber and Lyft, whose drivers are classified as independent contractors.

AB 5 codified a 2018 California Supreme Court decision, in the Dynamex Operations West, Inc. vs. Superior Court of Los Angeles case, that set new rules for how to classify independent contractors.

The new law has put into place a stringent “ABC test” for determining the validity of independent contractor relationships. This is because one of the requirements, the “B prong,” prohibits companies from using independent contractors unless the worker was performing work “outside the usual course of the hiring entity’s business.”

Because of this broad reading of what does and does not constitute an independent contractor, the law has had a spillover effect on musicians, freelance writers and a host of other professions. Like truckers, many of the people in these professions want to keep their freelance status for fear of losing their work, which is exactly what has happened.

The Dynamex ruling and AB 5 essentially state that workers who perform the work the company is in business to do are in fact employees and cannot be paid as independent contractors.

The distinction is important because employees are eligible for additional benefits and protections, and employers have to pay additional taxes for employees. Employees have rights to minimum wage, overtime and sick leave, among other benefits.

The law has not only raised the hackles of businesses, but also of independent contractors. In the truckers’ case, independent truckers value their freedoms and they invest more than $100,000 in their rigs to do their jobs.

There are more legal challenges to the law. Freelance writers and photographers filed suit in December 2019, alleging that AB 5 unconstitutionally restricts free speech and the media. Uber and Postmates filed suit alleging that the law’s targeting of app-based workers and platforms violates the Equal Protection Clauses of the United States and California Constitutions.

On top of that, Uber and Lyft have pledged $30 million to back a ballot initiative to overturn the law.

The state of play

By now, if you use independent contractors you should have reviewed all of their statuses and that in order not to be considered employees, they:

  1. A) Must be free from the company’s control when they’re on the job;
  2. B) Must be doing work that falls outside the company’s normal business; and
  3. C) Must be operating an independent business or trade beyond the job for which they were hired.

 

Some of the occupations and companies impacted by the law are:

  • Ride-hailing and delivery services — Like Uber, Lyft, DoorDash and Postmates
  • Truck drivers — Heavy duty trucks, Amazon delivery trucks, some tow truck companies
  • Janitors and housekeepers — Commercial cleaning services
  • Health aides — Nursing homes, assisted living facilities
  • Freelance writers — Newspapers, websites and other media
  • Newspaper carriers — AB 5’s author agreed to delay implementation by one year in a concession to newspaper publishers.
  • Unlicensed manicurists — Licensed manicurists will get a two-year exemption.
  • Land surveyors, landscape architects, geologists
  • Campaign workers
  • Language interpreters
  • Strippers

More Employers Get Premium Bills for ‘Misclassified’ Workers

contractor

One outgrowth of a new California law that applies more stringent criteria for what constitutes an independent contractor is that many employers are likely to see more audits and calls for additional premium from their workers’ comp insurers.

In fact, it’s already happening in some industries, according to the insurance industry trade press. More and more employers are being hit with sizeable surprise bills for additional premium by their insurers for allegedly misclassifying independent contractors as employees, according to one article in the Workers’ Comp Executive trade publication.

And this problem is only like to get worse in 2020 as the full effects of this year’s landmark independent contractor law, AB 5, take hold.

What’s happening now

The Workers’ Comp Executive reported that the California Department of Insurance’s administrative hearings bureau is receiving an increasing amount of complaints from employers that are disputing their workers’ comp insurers’ request for additional premium for workers that had originally been classified as independent contractors.

The publication cited the case of a construction company that State Compensation Insurance Fund says misclassified 42 individuals who worked for the company as independent contractors in 2017 and hence should pay an additional $114,000 in premium for that year. The dispute is currently in front of the administrative hearings bureau.

In 2018, the California Supreme Court handed down a game-changing decision in the case of Dynamex Operations West, Inc. vs. Superior Court, in which it rejected a test that’s been used for more than a decade to decide who qualifies as an employee or independent contractor.

The court instead said that California employers must answer ‘yes’ to the following three questions if they want to classify a worker as an independent contractor:

  • The worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact;
  • The worker performs work that is outside the usual course of the hirer’s business; and
  • The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hirer.

The impact of AB 5

In 2019, Assembly Bill 5, which essentially codifies the Dynamex decision into state law, was signed into law ― and it will take effect Jan. 1, 2020. But while the Dynamex decision specifically excluded the independent contractor test from use in applying workers’ comp premiums, AB 5 does not. The new law will apply to workers’ comp on or after July 1, 2020.

The law is not retroactive, however, so insurers should not be able to apply the new test for workers’ comp premium assessment purposes for policies that took effect before July 1.

Industry observers say they expect more California employers to receive additional premium calls from their workers’ comp carriers after the law takes effect. The law will have the most significant workers’ comp implications on industries including construction, real estate, professional services and fitness, which often have many workers classified as independent contractors.

Your workers’ comp insurer will not send you a demand for additional premium without conducting an audit of your payroll. If the insurance company deems any independent contractors that you use as employees, then it will calculate the amount of back premium it thinks you owe for them.

For employers who think the insurance company erred, they can usually challenge the decision with the insurer. However, if that fails, businesses have a second opportunity: to file a complaint with the Department of Insurance.

Newsom Set to Sign in Sweeping Independent Contractor Bill

independent contractor

California Gov. Gavin Newsom has signed legislation into law that will codify a court ruling from last year that set new ground rules for what constitutes an independent contractor, and which expands on that ruling.

There’s been a lot written in the media about the legislation, AB 5, and unfortunately much of it misses the point. Some news reports have said it will spell the end of independent contractors in the state and that anyone a company hires to do a temporary job on contract must be treated as an employee, along with all of the obligations that go with that relationship.

Now that AB 5 is the law, state and federal labor laws will apply to independent contractors who have to be reclassified as employees. That means they would be afforded all of the associated worker protections, from overtime pay and minimum wages to the right to unionize. Employers would have to cover them under their workers’ comp policies, and extend benefits to them as they do to other employees.

The bill also gives the state and cities the right to file suit against companies over misclassification.

In its essence, AB 5 codifies and expands on a 2018 California Supreme Court decision that adopted a strict, three-part standard for determining whether workers should be treated as employees.

Known as the “ABC test,” the standard requires companies to prove that people working for them as independent contractors are:

  1. A) Free from the company’s control when they’re on the job;
  2. B) Doing work that falls outside the company’s normal business; and
  3. C) Operating an independent business or trade beyond the job for which they were hired.

The court explained that the first prong aligns with the common-law test for employment, evaluating the degree of control exercised by the company over the worker. The second prong examines whether the worker can reasonably be viewed as working in the hiring company’s business.

The third prong inquires whether the worker independently made the decision to go into business. The fact that the hiring company does not prohibit the worker’s engagement in such an independent business is not sufficient.

The bill will likely cause many industries to reclassify workers by allowing the state to enforce a stricter standard for independent contractors and freelancers.

Occupations affected

Below is a list of those occupations and the types of companies that would be affected:

  • Rideshare & delivery services – Like Uber, Lyft, DoorDash and Postmates
  • Truck drivers – Heavy duty trucks, Amazon delivery trucks, some tow truck companies
  • Janitors and housekeepers – Commercial cleaning services
  • Health aides – Nursing homes, assisted living facilities
  • Newspaper carriers – The bill’s author agreed to delay implementation by one year in a concession to newspaper publishers.
  • Unlicensed manicurists – Licensed manicurists will get a two-year exemption.
  • Land surveyors, landscape architects, geologists
  • Campaign workers
  • Language interpreters
  • Strippers
  • Rabbis

Occupations that would be specifically exempted by the bill include:

  • Doctors
  • Some licensed professionals (lawyers, architects, engineers)
  • Financial services
  • Insurance brokers, accountants, securities broker-dealers, investment advisors
  • Real estate agents
  • Direct sales (the salesperson’s compensation must be based on actual sales rather than wholesale purchases or referrals)
  • Commercial fishermen (exempt until 2023)
  • Builders and contractors (who work for construction firms that build major infrastructure projects and large buildings)
  • Professional services (marketing, human resources administrators, travel agents, graphic designers, grant writers, fine artists)
  • Freelance writers, photographers (provided the worker contributes no more than 35 submissions to an outlet in a year)
  • Hair stylists, barbers (provided that the person sets their own rates and schedule)
  • Estheticians, electrologists, manicurists (must be licensed)
  • Tutors (must teach their own curriculum, and does not apply to public school tutors)
  • AAA-affiliated tow truck drivers.

What employers should do

Legal experts recommend that employers:

  • Perform a worker classification audit, and especially review all contracts with personnel.
  • Determine which benefits and protections should be provided to any workers who are reclassified from independent contractor to employee (think health insurance and other benefits).
  • Notify any state agencies about corrections and changes to a worker’s status.

Discuss with legal counsel whether they should now also include them as employees for the purposes of payroll taxes, workers’ compensation insurance, federal income tax withholding, FICA payment and withholding.