As explained by Sara B. Boyns, Esq, Fenton & Keller,  January 24, 2020

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What is AB-5
Borello Test How Does AB5 Affect Musicians, Artists, and Other Arts Professionals?
I Can’t Meet the ABC Test and None of The Exemptions Apply- What are My Options?
Risk Assessment-Should I Worry About This?
DOWNLOAD: Professional Services Independent Contractor Checklist
DOWNLOAD: Business to Business Independent Contractor Analysis
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The information in these materials is provided for general informational purposes only and is not intended to constitute legal advice. You should seek the advice and opinion of a qualified, licenced attorney on specific facts, circumstances, and legal issues that concern you before acting on any information provided in these materials

1. AB-5?

On April 30, 2018, the California Supreme Court issued its opinion in Dynamex Operations West Inc. v. Superior Court, which retroactively changed the test for determining whether an individual is an employee or independent contractor within the state of California. The Court adopted the “ABC Test,” under which workers are presumed to be employees unless all three of the following conditions are met:

(A) The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and

(B) The service is performed outside the usual course of the business of the employer; and, 

(C) The individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

AB 5 was signed to codify the Dynamex decision.* AB 5 lists several exemptions to the ABC Test; if a worker falls into one of these exemptions, the ABC Test does not apply and instead, the old Borello test applies to determine if a worker is an employee or an independent contractor.

*Several lawsuits have been filed challenging AB5. On December 30, 2019 Uber and Postmates filed suit in federal court asserting the law violates the equal protection and due process clauses of the Constitution. Freelance journalists and photographers filed suit in December 2019 alleging AB5 unconstitutionally restricts free speech, free press and equal protection. The California Trucking Association also filed a lawsuit in November 2019.

2. Borello Test

Determining Worker Status

The California Supreme Court established the Borello test in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations in 1989. This test relies upon multiple factors to make the determination of whether a worker is properly classified, including whether the potential employer has 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).

3. Effects

How Does AB5 Affect Musicians, Artists, and Other Arts Professionals?

1) Are you an employee, employer, or both?

The statutory default is to define all workers as employees. It is up to the hirer to prove that a worker is correctly classified as an independent contractor.

a) Examine the ABC Factors to see if you (or the person you are hiring) meet all 3; if not the worker is likely an employee.

i) Factors B and C are the most difficult for businesses to prove.

• Factor B - The service provided has to be “outside the usual course” of the hirer’s business.

(a) The statute does not provide guidance on how “the usual course of business” is defined. For example, does the hirer’s mission statement define its usual business? Does the service have to generate revenue for it to be a part of the usual course of business?

(b) Without guidance regarding how to define what is within a business’s “usual course of business,” this factor will be determined on a case by case basis.

• Factor C- The worker has to be “customarily engaged in an independently established trade, occupation, profession, or business” as the service the worker is being hired to perform.
• (a) The statute does not define “customarily” and does not state if the worker merely needs to hold themselves out as available to perform services for others; or if the worker actually has to perform the same services for others. It also does not state whether the worker has to form a business entity to meet this requirement.

2) I can’t prove all three ABC factors; now what do I do?

a) AB5 contains many exemptions. If an exemption applies to you or the person you are hiring, then the classification of the worker may be determined by the less stringent Borello

Test. A common misunderstanding is that if an exemption applies the worker is automatically an independent contractor- this is not the case. The worker still needs to fit the requirements of the Borello test in order to be properly classified as an independent contractor.

b) Exemptions that may apply:

• i) Professional Services Exemption- may apply to:
• Fine Artists
• The term “fine artists” is not defined in the statute.**
• Photographers
• Graphic Designers
• Freelance writers

*See the attached Professional Services Checklist to see if you meet the 6 requirements to qualify for this exemption.

ii) Business to Business Exemption – requires a “bona fide business-to-business contracting relationship.” If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the Borello test will apply if the 12 requirements of thebusiness-to-business exemption are met.
*See the attached business to business exemption checklist.

**The term fine artist; It remains to be seen how the Legislature, enforcement agencies, and courts will define this term. The Federal Bureau of Labor Statistics defines a fine artist as one who “...uses a variety of materials and techniques to create art for sale and exhibition.” For purposes of determining exemptions from certain wage and hour laws, the California Industrial Welfare Commission Wage Orders define an employee working in a “learned or artistic profession” as performing work that is original and creative in character in a recognized field of artistic endeavor that depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the above work; and that is predominantly intellectual and varied in character and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.

4. I failed the ABCs

I Can’t Meet the ABC Test and None of The Exemptions Apply- What are My Options?

1. Convert all or some workers to employee status- The safest approach is to convert all workers to employees. Set up or add workers to payroll, workers compensation insurance, provide sick leave and other benefits, provide sexual harassment prevention training, and comply with all other obligations of an employer in California.

2. Hire through a hiring agency or third party. This does not

eliminate all risk due to joint employer liability. However, it can minimize liability with proper practices and safeguards in place.

3. Continue to classify workers as independent contractors and see how it plays out this year. “Clean up” legislation (AB 1850) is pending this legislative session that may provide additional exemptions and clarification. Important legislative deadlines: February 21, 2020 is the last day for bills to be introduced. AB 1850 is sure to be amended and other bills may be introduced to address AB5. August 21, 2020 is the last day to amend bills, and August 30 is the last day for each house to pass bills. September 30 is the last day for the Governor to sign or veto bills.

5. Risk Assessment

Should I Worry About This?

1. Employers

a. Risk of claims by workers include:

• Unpaid overtime and minimum wage

• Meal and rest period violations

• Paystub violations

• Claims for reimbursement of business expenses

• Claims for benefits- retirement, sick leave, vacation, workers’ compensation, unemployment insurance and state disability

• Waiting time penalties for violation of the California Labor Code

b. Risk from governmental agencies include:

• Unpaid payroll taxes, social security, federal, state and local taxes, Medicare, plus penalties and interest
• Audits by the Employment Development Department, Internal Revenue Service, Franchise Tax Board, Department of Industrial Relations and potential assessment of penalties
• Potential criminal prosecution for failure to have workers compensation insurance (Ca. Labor Code 3700.5)
• Claims by the Division of Labor Standards Enforcement for willful misclassification

2. Employees

a. IRS or Franchise Tax Board audits and potential liability for taxes, interest, and penalties

b. Did you know that any business that provides Form 1099-MISC for services received from an independent contractor must provide the contractor's earnings and location information to the Employment Development Department? The report must be completed within 20 days of paying $600 or more to the contractor. This reporting requirement only applies to those who are doing business as an individual or sole proprietorship. According to the EDD the information provided to the EDD will be used to help to locate parents who are delinquent in their child support obligations. Could they use that information for audit purposes or to pursue misclassification claims?

Author contact: Sara B. Boyns
Author’s lawfirm website: Fenton & Keller

CONTENTS

What is AB-5
Borello TestHow Does AB5 Affect Musicians, Artists, and Other Arts Professionals?
I Can’t Meet the ABC Test and None of The Exemptions Apply- What are My Options?
Risk Assessment-Should I Worry About This?
DOWNLOAD: Professional Services Independent Contractor Checklist
DOWNLOAD: Business to Business Independent Contractor Analysis
DOWNLOAD THIS ARTICLE