Feb 23, 2020
Ceylan Karasapan Crow
As a freelance worker I decided to do some research on AB 5. Now I really know what it means to have opened pandoras box: doing something that causes a lot of problems to appear that were not known about before. There is a lot of information out there but the most comprehensive I found without an invite to a consultation from a law firm, is "The Independent contractor versus employee" page at CA.gov. and it is actually not too laden with lawyer speak, pretty straight forward. If you have the time and this law may affect you, it would behoove you to read that page: https://www.dir.ca.gov/dlse/faq_independentcontractor.htm
To get you familiar with the bones of the matter I compiled some excerpts from that page, as well as others that are all cited after selected quoted texts.
The Borello test is a requirement list outlining the qualifications of whether a worker could be classified as an independent contractor versus a full-time employee. It was the standard for classifying workers in the state of California before the ABC test.
It came from S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989)
"We ordered review to decide whether agricultural laborers engaged to harvest cucumbers under a written "sharefarmer" agreement are "independent contractors" exempt from workers' compensation coverage. fn. 1 Our answer has implications for the employer-employee relationship upon which other state social legislation depends. fn. 2
The grower claims the "sharefarmer" harvesters are independent contractors under the statutory "control-of-work" test, because they manage their own labor, share the profit or loss from the crop, and agree in writing that they are not employees. After taking evidence on the nature of the work relationship, the Division of Labor Standards Enforcement (Division) of the Department of Industrial Relations rejected these contentions. The superior court found that the Division's decision was supported by the evidence. However, these rulings were reversed by the Court of Appeal.
Like the Division and the superior court, we find the grower's arguments unpersuasive. The grower controls the agricultural operations on its premises from planting to sale of the crops. It simply chooses to accomplish one integrated step in the production of one such crop by means of worker incentives rather than direct supervision. It thereby retains all necessary control over a job which can be done only one way.
Moreover, so far as the record discloses, the harvesters' work, though seasonal by nature, follows the usual line of an employee. In no practical sense are the "sharefarmers" entrepreneurs operating independent businesses for their own accounts; they and their families are obvious members of the broad class to which workers' compensation protection is intended to apply. [48 Cal. 3d 346]
We therefore conclude as a matter of law on the undisputed facts that the "sharefarmers" are "employees" entitled to compensation coverage. Accordingly, we reverse the judgment of the Court of Appeal."
California’s 2018 Supreme Court case, Dynamex Operations West, Inc. vs. Superior Court of Los Angeles
"In 2004, a misclassification lawsuit was filed against a package and document delivery company called Dynamex which had converted all of its delivery drivers from employees of the company to independent contractors. The company used this tactic to cut costs at the expense of its own workers. Drivers continued to perform essentially the same job, but without the protections afforded under the California Labor and Unemployment Insurance Codes and wage orders.
In April 2018, the California Supreme Court issued the landmark decision Dynamex Operations West, Inc. v. Superior Court of Los Angeles which unanimously ruled in favor of the drivers and based its ruling on a three part “ABC” test used to determine employment status in other states." (https://www.californiansforthearts.org/ab5-about-blog/2020/2/7/ab-5-fact-sheet-from-assemblywoman-lorena-gonzalez )
"AB 5 codifies and expands the “ABC test” set forth by the California Supreme Court decision in the Dynamex Operations v. Superior Court case setting a new standard for determining whether workers in California should be classified as employees or independent contractors.
Taking effect on January 1, 2020, AB5 is further clarification of California’s 2018 Supreme Court case, Dynamex Operations West, Inc. vs. Superior Court of Los Angeles (4 Cal.5th 903).
The Dynamex case held that there is a general presumption that most workers are indeed employees, and should be classified as such. It placed the burden of proof for hiring entities to classify individuals as independent contractors under what is known as the three-part AB5 ABC test. The ruling and the newly signed bill require businesses to use the ABC test in determining whether a worker is an employee or an independent contractor." https://www.dir.ca.gov/dlse/faq_independentcontractor.htm
Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
A. The worker 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 worker performs work that is outside the usual course of the hiring entity’s business.
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed." ( Source and more details:https://www.dir.ca.gov/dlse/faq_independentcontractor.htm)
"The California Supreme Court established the Borello test in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341. The test relies upon multiple factors to make that determination, including whether the potential employer has all necessary control over the manner and means of accomplishing the result desired, although such control need not be direct, actually exercised or detailed. This factor, which is not dispositive, must be considered along with other factors, which include:
• Whether the worker performing services holds themselves out as being engaged in an occupation or business distinct from that of the employer;
• Whether the work is a regular or integral part of the employer’s business;
• Whether the employer or the worker supplies the instrumentalities, tools, and the place for the worker doing the work;
• Whether the worker has invested in the business, such as in the equipment or materials required by their task;
• Whether the service provided requires a special skill;
• The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision;
• The worker’s opportunity for profit or loss depending on their managerial skill;
• The length of time for which the services are to be performed;
• The degree of permanence of the working relationship;
• The method of payment, whether by time or by the job;
• Whether the worker hires their own employees;
• Whether the employer has a right to fire at will or whether a termination gives rise to an action for breach of contract; and
• Whether or not the worker and the potential employer believe they are creating an employer-employee relationship (this may be relevant, but the legal determination of employment status is not based on whether the parties believe they have an employer-employee relationship). "
(Source and more details: https://www.dir.ca.gov/dlse/faq_independentcontractor.htm)
Being labeled an independent contractor, being required to sign an agreement stating that one is an independent contractor, or being paid as an independent contractor (that is, without payroll deductions and with income reported by an IRS Form 1099 rather than a W-2), is not what determines employment status. The ABC test — or where appropriate, the Borello test or other standard under Labor Code section 2750.3 — are used to determine employment status. An employer cannot change a person’s status from that of an employee to one of an independent contractor by requiring a written agreement to that effect or by giving them an IRS Form 1099 instead of a W-2.
Q. What risks do employers face under the Unemployment Insurance Code for not properly classifying employees?
A. If EDD finds that workers are misclassified as independent contractor(s) when they should be classified as employee(s), employers face significant risks related to failing to comply with their obligations under the Unemployment Insurance Code. These risks include under-paying their taxes and having to pay their employees’ share of payroll taxes, both of which may result in incurring penalties and interest.
Q. What are the tax implications if a worker is classified as an independent contractor for federal tax purposes and employee for California tax purposes?
Q. The Franchise Tax Board, the state entity that administers personal income and franchise tax, will be providing guidance that addresses this question. There are different tax reporting and filing requirements for workers classified as employees or independent contractors. Once released, FTB’s guidance will also be available from this webpage."
1. AB 5 prejudices those intellectual property creators even as it desires to help them.
"The operation of AB 5 creates a deeply chilling effect on those who might be considering engaging any parties but especially engaging intellectual property creators. The actual legal outcome of the determination as to employee or independent contractor may be less important since the effect of “guessing wrong” by the Hiring Company or Businesses (which has that burden of proof) is likely to make that party less likely to want to take the chance and instead find another intellectual party creator in another state or another country.
More specifically, intellectual property creators are treated the same as parties who can only provide their services via their physical presence in the state. The distinctions between how parties are viewed under Dynamex compared to Borello and the carve out “exemptions” are largely distinctions without differences and, because of the burden of proof issues, do not form any form of “safe harbor” for either those creators or those who would engage those parties. Thus, if an Hiring Company or Businesses needs someone who, because of the nature of the work and services, must be in the state, indeed someone who must be in a given location within the state, that Hiring Company or Businesses has little choice but to treat those parties as employees with all the attendant issues. Individually those parties are not likely to be at a competitive disadvantage since all other parties are in the same situation. Moreover, these parties who are so hired often work for large businesses which may already have the business infrastructure (insurance, HR departments etc.) to simply include these other parties into the operation as employees, under their insurance and so on.
But intellectual property creators face competition from not only other such creators within the state, but also from those outside the state and indeed outside the country. An artist, writer etc. can be anywhere. An Hiring Company or Businesses has the world to choose from and the legal impediments to engaging someone in California, no matter how talented or tanned those parties might be, are likely to outweigh that talent…and that tan. And given that many potential engaging parties are small businesses or no businesses at all (individual authors for example), these requirements seem to place all those potential engaging parties out of the running for engaging California intellectual property creators.
2. Some find AB 5 to be discriminatory or at least arbritrary in classifying some professions as independent contractors and others not:
"It is unconstitutional to create arbitrary distinctions among expressive professions by exempting some, but not others, from AB5.
Real estate agents, yes
Travel agents, yes
Interpreters and translators, no
AB5 will limit an individual’s ability for flexible employment and destroys entire industries across California. Independent contractors and small businesses are the backbone of a thriving California economy.
AB5 deleteriously impacts a contractor‘s intellectual property.
If we are employees, the company owns our ideas, words, designs, compositions, etc.
AB5 devastates our right to own what we create.
EXEMPTIONS IN AB-5 that CURRENTLY APPLY to Nonprofit Arts & Culture Organizations?
AB-5 exempts a number of “professional services” from the requirement to satisfy the ABC test, including:
More Resources for the Arts:
Life After AB-5: A Toolkit by California Lawyers for the Arts -https://www.californiansforthearts.org/ab-5-tools-resources/2020/2/6/life-after-ab-5-a-toolkit-by-california-lawyers-for-the-arts
What is AB-5: Navigating AB-5 and Employment Law for the Arts -https://www.californiansforthearts.org/ab5-about-blog/2020/2/6/what-is-ab-5-navigating-ab-5-and-employment-law-for-the-arts
"Thankfully, Californians are fighting back. Freelancejournalists, truckers, and other gig economy workers all filed suits challenging the law. Their allies have introduced a ballot measure to overturn AB 5 while Uber, Lyft, and other app-based companies will spend over $100 million on that effort in 2020. This represents just a small fraction of the dollars and resources, the time and energy, that AB 5 is siphoning away from efforts to grow the economy and create jobs." https://www.sacbee.com/opinion/california-forum/article239316738.html
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