How Do I Protect My Business from AB5 Legislation?

By Elidia C. Dostal, Partner

There has been quite a bit of controversy surrounding California Assembly Bill 5 (AB5) since it took effect in January 2020. This piece of legislation — commonly known as the “gig worker bill”— requires companies that hire independent contractors to reclassify them as employees. This change in legislation caused a ripple effect on businesses, especially ones that relied heavily on independent workers.?

As a result of AB5, the California Employment Development Department (EDD) began a series of audits to determine if those gig workers should, in fact, be classified as employees. And if they are, the company may be liable for unpaid taxes, fines and interest. As a business attorney, I receive several questions regarding the business-to-business exemption under AB5. Let’s look at that exemption and why it may be important to your business.?

Under AB5’s so-called “ABC Test,” a worker is considered an employee—and not an independent contractor—unless the hiring entity can demonstrate that workers meet all three conditions of the ABC test:

1. The person is independent of the hiring organization in connection with the performance of the work, both under the contract for the performance of the work and in fact.
2. The person performs work that is outside the hiring entity’s business.
3. The person is routinely doing work in an independently established trade, occupation, or business that is the same as the work being requested and performed.

However, there is a business-to-business exemption to the ABC Test that has specific requirements under the California labor code. If a company wants to classify a worker as an independent contractor under the business-to-business exception, the independent contractor must meet ALL of the requirements under the exception:

1. Free from the control and direction of the contracting business entity??
2. Provide services directly to the contracting business rather than to customers of the contracting business??
3. Have a written contract with specific provisions regarding payment
4. Have a business license
5. Have a separate business location?
6. Have an independently established business??
7. Not restricted from providing the same or similar services to others
8. Hold itself out to the public as available to provide the services
9. Provide is own tools, vehicles, and equipment to perform the services?
10. Negotiates its own rates
11. Sets its own hours and location of work
12. Not performing work requiring a license from the Contractors’ State License Board??

ALL these requirements must be met to meet the business-to-business exemption from the ABC test.?

When you’re hiring a California independent contractor, one of the best decisions you can make for your business is assuring that individual has a business license. As stated earlier, the business license is a requirement for the business-to-business exception under AB5. In a payroll tax audit , the EDD auditor will look for evidence of one, even if it is not called a “business license” by the city. For example, the city of Laguna Niguel requires home-based businesses to obtain a certificate of occupancy rather than a “business license.” EDD auditors are looking for this permit for Laguna Niguel 1099s as proof that the business-to-business exception applies.?

Nearly every company has hired an independent contractor at some point. And chances are, you will hire more in the future, especially as remote working continues to grow strong, even post pandemic. When you’re hiring an independent contractor, make sure you work with an experienced business attorney who can review your contracts, agreements and business licenses, as well as those of your independent contractors, to assure your company is properly classifying workers as either employees or independent contractors.

Elidia C. Dostal is a business transactional and compliance attorney and partner with Vanst Law LLC. She serves business clients who understand the importance of involving an attorney at the front end of business transactions and compliance issues to avoid the high cost of detrimental contract terms, litigation, or regulatory fines. Elidia brings an expert understanding of the importance of thinking ahead to avoid potential future liabilities.