Q: What is California AB5 and how does it affect B2B contractors?
What is AB5, what exemptions exist, and how it affects B2B contractors / B2B vendors.
California Assembly Bill 5 (AB5), commonly referred to as the Uber/Lyft bill, affected many industries outside of the gig economy on January 1, 2020, when it went into effect. With uncertainty looming, the newly passed California bill in classifying workers from full-time to independent contractors, employers and owners have questions on how it impacts businesses, how workers are now classified, and what this means for the future. Of California’s 19.5 million workers, an estimated two million workers may be affected by AB5.
This legislation impacts every industry that leverages independent contractor talent. Over half of the United States workforce is projected to be non-permanent workers in the next 15 years, the trendlines are proving to be true. AB5 impacts the way business entities will interact with all potential workers requiring a reframing of how workers are classified.
Once AB5 became law, these two million workers were assumed to be full-time employees while the burden of proof was on the hirers to prove were not. The newly formed ABC test lays out three main factors in which all must be met: the worker is free from control and direction, the worker is performing work outside the usual course of the business of the hiring company, and the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. All three factors must be met in order to prove the independent contractor status of each worker.
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Exemptions for AB5
With a few industries already exempt, there are more industries— some conditional, others with complete exemption— expected to be added to this list:
- Doctors, psychologists, dentists, podiatrists, veterinarians
- Human resource administrators
- Travel agents
- Insurance & real estate agents
- Private investigators
- Direct sellers
- Fine artists
- Grant writers
- Marketing professionals
Assembly Bill 2257 (AB2257) expanded these exemptions by including independent contractors providing other specified services, such as translation of documents and digital content and feedback aggregation. Proposition 22, which passed on November 3, 2020, adds app-based drivers to these exemptions. Rideshare drivers are not to be classified as employees but rather as independent contractors.
Conditional Exemptions to AB5:
- Commercial fishermen – exempt from all requirements except unemployment insurance
- Manicurists, estheticians & barbers – exempt if they set their own rates, paid directly by clients and schedule their own appointments
- Photographers & photojournalists – 35 submissions limit to each hiring entity each year
- Graphic designers – 35 submissions limit to each hiring entity each year
- Writers, editors & newspaper cartoonists – 35 submissions limit to each hiring entity each year
The 35 submissions limit for photographers, photojournalists, graphic designers, writers, editors, and newspaper cartoonists was removed on September 4, 2020, when AB2257 went into effect.
What does submissions mean under California AB5?
California AB5 states that “For purposes of this clause, a “submission” is one or more items or forms of content by a freelance journalist that: (I) pertains to a specific event or topic; (II) is provided for in a contract that defines the scope of the work; (III) is accepted by the publication or company and published or posted for sale.”
Practical Implications of California AB5
As far as practical implications go, those workers newly classified as full-time employees (formerly classified as independent contractors) will be entitled to benefits such as unemployment insurance, healthcare, paid parental leave, overtime pay, and the state minimum hourly wage of $12. As this adds an estimated 30% to employer costs, the financial ramifications are projected to be significant.
What does AB5 say about B2B Contractors?
When it comes to B2B contractors, AB5 comes with a slightly different set of rules. AB5 exempts business-to-business contractors that meet 12 specific requirements (listed below) and passes the Borello test. The exemption also states that if a business (sole proprietorship, partnership, LLC, LLP, or corporation) contracts to provide professional services (such as marketing or freelance writers and content producers) to another business, the Borello test would be used to evaluate whether a worker should be classified as an employee or independent contractor. In other words, if a worker previously could be classified as an independent contractor, they can continue to be classified as an independent contractor if they have a legal entity to provide their services through.
What are the AB5 B2B Requirements?
- The business service provider is 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 and in fact;
- The business service provider is providing services directly to the contracting business rather than to customers of the contracting business;
- The contract with the business service provider is in writing;
- If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration;
- The business service provider maintains a business location that is separate from the business or work location of the contracting business;
- The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed;
- The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity;
- The business service provider advertises and holds itself out to the public as available to provide the same or similar services;
- The business service provider provides its own tools, vehicles and equipment to perform the services;
- The business service provider can negotiate its own rates;
- Consistent with the nature of the work, the business service provider can set its own hours and location of work;
- The business service provider is not performing the type of work for which a license from the Contractors State License Board is required.
The lesson here: when hiring an independent contractor, be sure to request proof of a legal business entity, a business location (must be separate from the hiring entity’s address), a written contract, and a business license. Make sure you are covered and understand the necessary paperwork in working with independent contractors for the future.
Once independent contractor status is established, Liquid makes it easy for independent contractors to set up their own shop and provide services. Click here to learn how.
Category: Compliance Ask Liquid Human Resources Industry Trends
Updated: January 3, 2021
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.