California Independent Contractors Law

By: Steven Rich, MBA in 2020

The California “Independent Contractors Law” took effect on January 1, 2020.

First of all, I want to thank the State of California for creating more writing gigs opportunities for me as a non-California resident freelance writer.

But, this new law spells bad news for California small businesses and freelancers.

How the New California Independent Contractors Law Affects Business in 2020

This new law makes it harder for California companies and employers to treat workers as independent contractors. According to CBS News, this forces small businesses who can’t afford to hire employees to seek independent contractors from outside of California. 

The law affects all California businesses including ride-share companies like Lyft and Uber using independent contractors.

Now, the choice for a California business becomes between hiring a California worker as a full or part-time employee. Gone are the old days of designating one or more as an independent contractor (W-9 or 1099) if the person resides in California.

According to Forbes, many California independent contractors lost their gigs because of this new law. Source

The Seattle P.I. newspaper recently published a news story about this new law explaining the impact on California small business owners. It described how one California small business owner must change the status of five of her consulting contractors to employees to follow the new law. She must pay those more to meet state minimum wage standards and to provide typical employee benefits. This will result in raising her prices to cover the extra costs.

San Diego’s KUSI News reports dozens of California independent contracts to claim harm by Assembly Bill 5 including cartoonists, musicians, translators, truckers, photojournalists and more.

On January 10, 2020, a Los Angeles Superior Court judge ruled that truckers exempt from AB 5 because it violates federal laws regulating truckers.

The Times of San Diego opinion piece declared AB5 a “historic mistake”.

The Sacramento Bee reported that AB5 “will wreck the livelihoods of writers, freelance photographers, and independent truckers”.

 Harsh Penalties for Violating California’s Independent Contractor Law

Failing to follow the new law leads to harsh penalties ranging from $5,000 up to $25,000 for every violation. Source     

Also, workers maintain the right to sue the company for hiring independent contractors.

According to the San Francisco Examiner, California Governor Newsom seeks $20 million for AB5 enforcement.

 History of the California Independent Contractors Law

In 2018, a California State Supreme Court ruling declared that “workers misclassified as Independent contractors lost protections and rights such as minimum wages, worker’s compensation, and unemployment compensation”. Source

This case, called “Dynamex Operations West vs. Superior Court of Los Angeles County” changed the world of independent contractors in California.

In 2019, California Assembly Bill 5 (AB 5) codified this landmark ruling.

This new law automatically classifies all California workers as employees and not independent contractors.

Also, the burden of proof lays with the hiring party to prove a worker as an independent contractor.

 The New California Independent Contractors Law Establishes an ABC Test

 Although the new law classifies all California workers as employees, an “ABC” test allows hiring parties to claim independent contractor status for new workers.

The ABC test requires the following three steps to classify a worker as an independent contractor:

A.   Complete freedom from the hiring company’s control and direction about how and when they perform their job;

B.   All work performed outside of the hiring company’s business place; and

C.   The worker engages in a traditional independent established business, occupation, or trade for other clients or customers. 

Exceptions to the ABC Test

Some professions became exempt from the new law such as:

• Accountants;
• Architects;
• Attorneys;
• Dentists;
• Doctors;
• Engineers;
• Insurance agents;
• Insurance brokers;
• Investment advisors;
• Professional writers;
• Securities broker-dealers;
• Travel agents; and
• Veterinarians.

 However, exempt professionals working as independent contractors must maintain the freedom to:

• Negotiate their fees;
• Set their own hours; and
• Exercise their own judgment when doing their job.

The Borello Test

 But, while they don’t need to pass the ABC test, they must pass the “Borello” test.

This IRS test determines if a taxpayer comes under an independent contractor (1099) classification.

It became law in California with the S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989) case.

According to the Business Insider, the Borello test requires looking at many factors to determine:

1. Evaluation of the working relationship;
2. Whether the work is essential to the client’s (customer’s) regular business; and
3. If the parties believe they act in an employee–employer relationship.

A California law firm reports that the Borello test still applies to all exceptions to the ABC test.

The Bottom Line: Both the ABC test and the Borello test try to determine if the worker controls how and when he or she works. A hiring party that sets working days and hours and provides guidelines about how the work gets done fails both tests.

How AB5 Applies to Semi-Autonomous Workers

 Exemptions also apply to semi-autonomous workers in:

• Hair and nail salons;
• Barbershops; and
• Spas.

 This exemption only applies if they set their own:

1. Hours and rates;
2. Choose their own clients; and
3. Get paid directly by the client.

How AB5 Affects Freelance Creatives

 Another area the new law affects concerns the “freelance creatives” such as:

• Designers;
• Photographers;
• Editors;
• Writers; and
• Similar creative professions.

Limits: Freelance creatives can’t submit more than 35 pieces of content to a single employer within one year. Submitting more than 35 pieces of content automatically reclassifies the independent contractor as an employee.

The Business Insider story quoted an award-winning California film director and photographer who complained that in the future he can only do a maximum of 35 shoots for each client. If more shoots needed, the client must hire someone else. He complained this leads to loss of future revenue.

How Freelancers Get Around the New Law

 Making sure he or she passes the ABC test. This involves:

1. Preparing a written contract specifying the freelancer’s independence regarding when and how the work gets done and how the job involves traditional independent work.

2. Never performing work on the hiring company’s premises. 

3. Also, freelancers should form a sole proprietor (or a legal entity like a corporation or LLC) business.

4. Register as a business with a city or local government issuing business permits.

5. Print and distribute business cards like a normal independent business.

6. Create a website promoting an independent business.

Or, live outside of California and promote your freelance business inside of California. Like me.  

How Independent Contractors Save Employers Money

 Startups and businesses struggling financially suffer under this new law. Hiring official employees cost a lot more than an independent contractor. I published an article explaining the economic benefits of hiring independent contractors here.

Independent contractors cost less than employees because employers don’t pay 6.2% of wages and salary for Social Security and 1.45% for Medicare contributions. That’s a savings of 7.65% on all wages paid.

On top of the 7.65% of salaries and wages employers pay for Social Security and Medicare, they also pay for disability and unemployment insurance and worker’s compensation.

Also, employers pay less accounting fees because of fewer employment and tax records for independent contractors.

In 2018, the JP Griffin Group, an employer benefits advising company, concluded that “employers spend an average of $11.38 per hour per employee on benefits”.

Independent Contractors Give Up Employment Benefits

 As self-employed persons, independent contractors don’t receive:

• 401(k) contributions;
• Health insurance;
• Paid vacations;
• Maternity leave; and
• Protection from illegal terminations for no cause. 

Conclusion

California’s new “Independent Contractors Law” started off with a bang in 2020.

California attempted to protect its workers from classification as independent contractors to protect their right to employee benefits. Instead, a backlash occurred from small business owners and freelance contractors happy with their status.

Small business owners complain about the extra costs to hire employees and provide them with benefits. This forces them to raise their prices at a cost of less business.

Freelancers who enjoy their status as independent contractors see a bleak future where current and potential clients can’t hire them.

California’s new law classifies workers as independent contractors under either the ABC test or the Borello test this way:

1. Employers can’t control the work and how it’s done;
2. Employers can’t set the hours of work;
3. Contractors must never perform work at the employer’s place of business; and
4. The job performance must differ from the employer’s regular business.

For example, a graphic designer can’t work as an independent contractor for a graphic design business.

Exemptions and exceptions to AB5 exist for professionals, creative freelancers, and semi-autonomous workers. But, they must either pass the ABC or the Borello test.

With harsh penalties ranging from $5,000 to $25,000 for every violation and a $20 million budget for enforcement, many employers will not hire independent contractors.

Expect many lawsuits challenging this new law like the one in Los Angeles County Superior Court for independent truckers.

Out of state contractors may see a rise in business from California companies, entrepreneurs, and small businesses.

Thank you, the State of California for opening new doors for my professional writing business from your citizens.

Steven Rich, MBA

Copyright ? 2020 – Steven Rich, MBA