AB 5 EXPLAINED

AB  5 has now been signed by the Governor and therefore enrolled.  Please note that the changes in how to determine whether someone is an employee vs. independent contractor will not apply retroactively and will not take effect for workers’ compensation purposes until 07/01/2020[i]

The bill is somewhat lengthy, even complicated, so let us break it down as follows:

THE BORELLO STANDARD

In 1989, the California Supreme Court issued its decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations [48 Cal.3d 341].

This case involved an arrangement by which seasonal “share farmers” who harvested cucumbers signed an agreement under which they were deemed independent contractors.  Borello was a grower in Gilroy, which controlled virtually all aspects of the farming, cultivation and harvesting process.  The growing cycle for cucumbers was 60 days.  The facts were Borello planted and cultivated its crops at its own expense, using its own pipe irrigation system and applying pesticides when needed.  The harvest workers would arrive 2 to 3 weeks before the harvest began and they were informed that under the signed agreement, they would harvest on a first-come, first-served basis.  The harvesters were required to hoe and to weed during which times they were not under any active supervision by Borello.  They could set their own hours and decide when to pick each cucumber at the correct size in order to maximize profit.  There was a profit incentive built-in based upon the size and quantify of the harvested cucumbers.  Borello maintained no field supervisors, did not direct the harvesters’ work and they provided bins and effectuated transportation after the harvesting.  Each week, the share farmer would obtain proceeds based upon what was harvested.  After the harvest was over the share farmers would then leave.

The Borello court determined that the share farmers were not independent contractors but rather employees.  That virtually all aspects of the cultivation enterprise, featuring the planting, growing and harvesting process were under the exclusive control and dominion of Borello.  Even though the share farmers were not specifically “supervised” while harvesting, that was simply one piece of an integrated process, which had been segregated out for special handling. 

The Supreme Court held the principal factor is the determination as to whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired.  This is the so-called “control-of-work details” test. 

Even though the decision in Borello embraced the “control-of-work details” test as the leading principal factor, it also enunciated that there were nine additional factors to consider in making the determination whether one is an employee or independent contractor.  These factors are:

1.            Right to discharge at will, without cause;

2.            Whether the one performing the services is engaged in a distinct occupation or business;

3.            The kind of occupation, with reference to whether in the locality the work is usually done under the direction of the principal or by a specialist without supervision;

4.            The skill required in the particular occupation;

5.            Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;

6.            The length of time for which the services are to be performed;

7.            Method of payment, whether by the time or by the job;

8.            Whether or not the work is part of the regular business of the principal; and

9.            Whether or not the parties believe they are creating the relationship of employer-employee.

Taken together, the so-called “Borello test” therefore incorporates as the leading indicated principal the right of control but secondarily the other nine enunciated factors.  Please keep in mind that the underlying purpose was to give effect to the interpretation of the statute and therefore these factors are determined and analyzed in light of the legislative intent.  (This is also referred to as the “multi-factorial test”)

The so-called “Borello test” has been followed since 1989, in order to assess whether a relationship is one of employment or independent contractor. 

DYNAMEX

The first thing to remember here is that Dynamex is not a workers’ compensation case but rather one exclusive to California wage orders.  Dynamex involved an attempted certification of class action status for alleged employees, who were performing services for Dynamex involving the delivery of parcels and items.  The Dynamex court was very sympathetic to the existence of pervasive abuses in the misclassification of employees.  Without going into extensive detail, the Supreme Court has revisited Borello and in this lengthy decision spanning over 40 pages, the Supreme Court determined that for the purpose of wage orders only, Borello is no longer the test.  It will be supplanted by a simpler and more easily accommodated test known as “ABC.”   As the court stated in part:

“For the reasons explained hereafter, we conclude that in determining whether, under the suffer or permit to work definition, a worker is properly considered the type of independent contractor to whom the wage order does not apply, it is appropriate to look to a standard, commonly referred to as the “ABC test,” that is utilized in other jurisdictions in a variety of context to distinguish employees from independent contractors.  Under this test, a worker is probably considered an independent contractor to whom a wage order does not apply only if the hiring entity established:  [A] that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; [B] that the worker performs work that is outside the usual course of the hiring entities business; and [C] that the workers is customarily engaged in an independently-established trade, occupation, or business of the same nature as the work performed for the hiring entity.”

AB 5

In specific recognition of the Dynamex decision, the legislature has passed, and the Governor has now signed AB 5.  The bill is specifically a codification of the Dynamex decision, which now renders Dynamex applicable to all aspects of the employment relationship, including workers’ compensation, subject to some exceptions.

Under AB  5, there is a presumption that a worker will be deemed an employee unless the employer can disprove the presumption by applying the ABC test as made applicable in Dynamex and now made specifically applicable to workers’ compensation.  However, the “ABC” test is used first, unless a “court of law” should rule that the “ABC” test cannot apply within the factual context.  On top of that, they carve out specific “exceptions” where Borello will still apply. 

Accordingly, Section 2750.3 is added to the Labor Code which indicates that 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 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 and in back;

B.            The person performs work that is outside the usual course of the hiring entities 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.

If we examine the Borello test versus the ABC test, it is noted that Borello contains more factors but Lab C Section 2750.3 mandates that work performed is “outside the usual course” of the hiring entity’s business versus “distinct occupation or business” under Borello.  I believe that the “outside” criteria makes it more difficult to frame a worker as an independent contractor versus the looser and more generic terms employed by Borello. 

But the new statute goes on to indicate that “if a court of law rules that the three-part test in Paragraph (1) cannot be applied to a particular context based on grounds other than an expressed exception to employment status as provided under Paragraph (2), then the determination of employee or independent contractor status in that context shall be governed by the California Supreme Court’s decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48Cal3d 341) Borello.

The statute also goes on to carve out a numerous number of exceptions based upon type of occupation for which Borello would apply.  These include the following:

1.            Insurance broker or agent;

2.            Physician, surgeon, dentist, podiatrist, psychologist or veterinarian;

3.            Lawyer, architect, engineer, private investigator or accountant;

4.            Securities broker or investment advisor or agents;

5.            Direct sales person;

6.            Commercial fisherman.

The statute then defines specified “professional services” and if the status of the work falls within the purview of “professional services” then Borello applies.  This only occurs if several conditions are satisfied under this new statute:

A.            The individual maintains the business location, which may include the individual’s residence, that is separate from the hiring entity.  Nothing in the subdivision prohibits an individual from choosing to perform services at the location of the hiring entity.

B.            If the work is performed more than 6 months after the effective date of this section, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in their profession;

C.            The individual has the ability to set or negotiate their own rates for the services performed;

D.            Outside of project completion dates and reasonable business hours, the individual has the ability to set the individual’s own hours;

E.            The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds himself out other potential customers as available to perform the same type of work;

F.            The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.

The term “professional services” means services that meet criterion including: marketing, administrator of human resources, travel agent, graphic designer, grant writer, fine artist and services provided by an enrolled agent licensed by the U.S. Department of the Treasury to practice for the IRS, payment processing agent through the independent sales organization, services provided by a still photographer or photo journalist, services provided by a freelance writer, editor or newspaper, cartoonist who does not provide content submissions, services provided by a licensed esthetician, licensed electrologist, licensed manicurist, licensed barber or licensed cosmetologist. [And under these subsections more conditions are imposed.]

The list goes on to include real estate licensees and repossession agencies.  Again, for the coverage of these individuals and organizations, the Borello test is applicable and not Dynamex.

COMMENT:

For workers’ compensation purposes, there will be no changes before dates of injury on or after 07/01/2020.  The essential change is that the “ABC test” will be used in all cases except for a “court of law” finding the test does not apply within a specific context of facts and/or the enumerated exceptions.  The ABC test appears to be more restrictive than Borello (harder to prove non-employment) because it requires proof that the individual was working “outside the usual course” of the hiring entity’s business and was free from control and direction.  The “free from control and direction” is not the same or essential equivalent of the “right to control the details and means of accomplishing the result.”  In other words, the “right to control” can be a shared one.  But here the ABC test appears to be more restrictive. 

For purposes of workers’ compensation issues, the ABC test will likely make it more difficult to prove that someone is an independent contractor.

However, the bill has two large “carve outs.”  The first is when a court “rules that the three-part test” cannot be applied to a particular context based on ground other than express exception.”  To me this is unclear.  Does this require a trial before the WCAB where a judge must rule that the ABC test cannot apply?  And is the Appeals Board a “court of law” defined by this statute?  This language is vague and will likely spark litigation and appeals.

The second “carve out” pertains to certain types of professions and business-to-business relationships as set forth above.  Unfortunately, these professions or classifications are not the usual and customary job classifications that we normally see in workers’ compensation.  So, I believe that for purposes of these occupations or professions, applying the Borello test would really yield no measurably different result than using the ABC test.

The confusing part is this.  They define “professional services” and then they apply Borello but then they impose new and different conditions or factors beyond those in Borello.  For example, this bill requires a Borello analysis for “professional services” but requires proof that the individual maintains a business location, that is separate from the hiring entity, work performed more than 6 months after the effective date of this section, the individual has a business license in addition to any required professional license, the individual has the ability to set or negotiate their own rates for the services performed.  That the outside of project completion dates and reasonable business hours the individual can set the individual’s own hours.  The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers is available to perform the same type of work.  The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.  And it goes on.  This is more expansive than Borello.  Therefore, the new statute creates a “hybrid” consisting of both Borello factors and the new conditions imposed under statue.

The bottom line is that unless someone is a professional or has a business distinct from the employer, the WCAB will likely embrace this decision to essentially make it all but impossible to define someone an independent contractor.

I can see a scenario under which the business provider meets all criteria but may have a lapsed business license or there is no “formed business entity.”  It could be simply an individual who has his own home-based business.  And if there’s no written contract with business-to-business providers then the individual in question would always be deemed an employee. 

This is likely to place the burden on business to ensure that all their contracts for business-to-business relationships pass muster. 

Thanks,

Corey


[i] Lab C 3353(i)

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