More on AB5: Common Law Rules versus California regarding Independent Contractors

Small businesses are threatened by AB5, the new Independent Contractor law, and as a result of the sweeping changes some may end up going out of business. The following will help you figure out what you need to know and do to survive AB5.

The chart below depicts the differences between California and Federal Law on Independent Contractors, as well as an in-depth analysis on what each of their rules are.

This is a continuation on AB5. Read the previous post here

IRS rules on Independent Contracting

Under common-law rules, anyone who performs services for you is your employee if you control what they do and how they do it. This applies even when you give the employee freedom of action. What matters is that you have the ability to control the details of how the services are performed. Common law is a body of unwritten laws based on legal precedents established by the courts.

For federal employment tax purposes, the usual common law rules are applicable to determine if a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker and the business. Consider all evidence of the degree of control and independence in this relationship. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Relationship of the Parties.

Behavioral Control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.

Financial Control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

• The extent to which the worker has unreimbursed business expenses

• The extent of the worker’s investment in the facilities or tools used in performing services

• The extent to which the worker makes his or her services available to the relevant market

• How the business pays the worker

• The extent to which the worker can realize a profit or incur a loss

Relationship of the Parties covers facts that show the type of relationship the parties have. This includes:

• Written contracts describing the relationship the parties intended to create

• Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay

• The permanency of the relationship

• The extent to which services performed by the worker are a key aspect of the regular business of the company

New State of California rules on Independent Contracting

One of the exemptions in AB 5 is for bona fide “business-to-business” contracting relationships. The statute describes these as relationships in which a “business service provider” provides services to a “contracting business.” But even an independent contractor agreement may not be enough to defend you. For the “business-to-business” exemption to apply, all of the following conditions must be met:

• The “business service provider” (i.e., contractor) must be free from the control and direction of the “contracting business entity” in connection with the performance of the work, both under the contract for the performance of the work.

It should be noted that California has a very strict stance on the ABC test that all elements must be met on the test. False designation of employees as independent contractors are in violation of state wage orders. AB5 broadens the horizons of the ABC test, which is done to stop state wage violations,  so that it applies to more businesses, which were able to avoid punishment for misclassification. To help enforce this law, city attorneys are authorized to sue employers that violate the law.

These occupations that were treated as independent contractors in the past will be covered under AB 5: health care professionals, ride share services, delivery service workers, truck drivers, janitors and housekeepers, health aides, performers and other entertainment professionals, land surveyors, architects, and geologists, campaign workers, language interpreters, exotic dancers, rabbis and other clergy.

Among the exceptions are licensed physicians, lawyers, engineers, tutors (that teach their own curriculum, and that are not public school tutors), commercial fishermen, AAA-affiliated tow truck drivers, real estate agents, accountants, and private investigators; certain marketing and human resources professionals; and licensed manicurists and barbers who can meet certain conditions, including setting their own rates.