Compliance with California AB5 B2B Requirements
Learn how Liquid supports your compliance with all 12 California AB5 B2B Requirements.
Compliance with California AB5 is affecting businesses nationwide who use independent contractors and freelancers. Specifically, companies are confused about how AB5 affects relationships business-to-business (B2B) contractors and how the Borello Test is related to AB5 — and how this affects independent contractor compliance.
AB5 exempts business-to-business contractors that pass the Borello Test and meet 12 specific AB5 B2B requirements.
Assuming your B2B contractor is not performing work that requires a license from the Contractors State License Board (CSLB) of California — one of the twelve AB5 B2B requirements — here’s how Liquid helps you and your B2B contractors and B2B vendors meet these requirements (plus prevent legal issues and supports your compliance).
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Using Liquid to Automate Independent Contractor Agreements / Freelancer Contracts
Four of the twelve AB5 B2B requirements pertain to contracts and the level of control exercised by the company (“contracting business”, to use the terminology of AB5). These requirements are:
- 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 contract with the business service provider is in writing.
- The business service provider provides its own tools, vehicles and equipment to perform the services.
- Consistent with the nature of the work, the business service provider can set its own hours and location of work;
When you use Liquid to manage and onboard your vendors, service providers, and freelancers, you gain access to Liquid’s default independent contractor template. Sending contracts to your service providers becomes an automated process, ensuring you meet the requirement that mandates a written contract. In Liquid, you can use your own templates for independent contractor agreements / freelance contracts, or you can use Liquid’s pre-existing default templates.
Download Liquid’s Independent Contractor Agreement Checklist as a handy reference guide.
When you use Liquid’s templates, you use a contract that states that your independent contractor (vendors and freelancers) are free from your control and direction. Moreover, it implies that the independent contractor can set their own hours and location of work, and that no tools or equipment are provided by your company. Assuming you don’t attempt to control your contracted business service provider’s performance and work, Liquid’s automated processes support your compliance with these AB5 B2B requirements.
Liquid’s contracts also cover one additional AB5 B2B requirement:
- 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.
As you customize your onboarding processes in Liquid, note that Liquid’s default templates include standard language that states that the vendor represents that they have secured all required business licenses. In terms of AB5 B2B requirements, it’s hard to know at this time whether courts will insist that the burden of proof of business license will fall to you (or whether what is stated in the contract will be sufficient) — but having this standard language is a great first step. Talk to your attorney to see if you should also require your vendors to provide copies of their business licenses.
Get access to Liquid’s Default Templates.
Using Liquid’s Automated Onboarding Process
One of the twelve AB5 B2B requirements pertain to details of the independent contractor (“business service provider”, to use the terminology of AB5):
- The business service provider maintains a business location that is separate from the business or work location of the contracting business.
When you use a Freelance Management System like Liquid to automate your onboarding process for freelancers, vendors, independent contractors, and service providers, you can create customized onboarding processes. The default process requires vendors to list their business address. It encourages vendors to use an EIN (versus a social security number) — strengthening the argument that your vendor is a separate business with its own work location and supporting your compliance with AB5 B2B requirements.
Liquid Allows Vendors to Advertise as a Service Business and Engage Other Clients
Two of the twelve AB5 B2B requirements pertain to the independent contractor (“business service provider”, to use AB5 terminology) offering services to other businesses — other than solely your own company (“contracting business”) — and the nature of the contractor’s business. These requirements are:
- 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 actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
When you invite a vendor to Liquid, that vendor is automatically able to use Liquid to interact with other clients. Moreover, the vendor is able to make their profile searchable by any hiring entity using Liquid — making it easy for vendors to advertise their services publicly. Within Liquid, your vendor can establish their company profile for inclusion in vendor search results and make themselves available for requests.
By engaging your vendor on Liquid, you are helping them more broadly establish themselves as a service provider without restrictions.
Managing SOWs in Liquid
Three of the twelve AB5 B2B requirements pertain to the specific services provided by the independent contractor (“business service provider”, to use the terminology of AB5) and the rates for such services. These requirements are:
- The business service provider can negotiate its own rates.
- 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 is providing services directly to the contracting business rather than to customers of the contracting business.
Liquid simplifies the creation, negotiation, and agreement of SOWs with vendors. Both you and the vendor can initiate SOWs — which always include rates. These rates can be hourly, flat, or other permutations, but what’s important is that the vendor can negotiate rates by choosing to reject an SOW or send back a counter-proposal.
Moreover, if your vendor is using Liquid to manage SOWs with other clients, your vendor establishes itself as an independent provider of services. Lastly, the SOWs are clearly between you and your vendor — and don’t list your own customers as the client or recipient of the contracted work.
Liquid Supports Compliance With AB5 B2B Requirements
Complying with these requirements establishes a sound business-to-business relationship between hiring companies and independent contractors, but it also requires careful strategic planning. It can be intimidating to read the list of twelve California AB5 B2B requirements and translate that to how it affects your relationships with your business-to-business (B2B) contractors and vendors. After reading this post, you’ve hopefully learned how Liquid supports your compliance with all twelve AB5 B2B requirements.
Consequences of California AB5
The effects of California AB5 remain to be seen — and AB5 is likely to be tested in the courts before the consequences are entirely understandable — but it’s already affecting how businesses in California (and nationwide) engage freelancers and vendors. One thing is certain: it’s best to be proactive in ensuring compliance with changing rules and regulations related to freelancers.
Liquid has the features you need to stay compliant with independent contractor / freelancer rules and regulations, whether or not you are affected by California AB5.
Ready to simplify compliance with rules and regulations related to independent contractors, freelancers, and vendors? Try Liquid today!
Note, we are not providing legal, tax or payroll advice. Please consult your legal, tax and payroll professionals. These are simply to serve as guidelines based on our own experiences.
Updated: July 13, 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.