What California’s New AB5 Law Means for Firms and Independent Consultants

What California’s New AB5 Law Means for Firms and Independent Consultants

A new California law designed to protect employees and independent contractors has gone into effect, and it’s making waves across the country as many businesses and workers grapple with its impact.

The new law, California Assembly Bill 5 (AB5), potentially affects any business that hires California residents as independent contractors. But there is widespread misunderstanding and misreporting about which job categories are impacted.

The good news for Graphite clients who hire our independent consultants is that business-to-business (B2B) contractors are exempted from the law. If you hire a Graphite consultant who resides in California, and you have a bona fide B2B contracting relationship that meets existing criteria, the law’s new rules and requirements don’t apply.

However, you still need to meet the existing criteria to prove that a California B2B contractor is not an employee. This is similar to federal IRS requirements that allow companies to treat a worker as an independent contractor.

If you’ve been working with California-based B2B contractors and your business relationships already meet the existing criteria, nothing has changed for you. However, it’s always good to be familiar with the requirements and make sure you’re meeting them.

Let's take a look at the the B2B independent contractor requirements in California and how they work.

The Borello Test

In California, the Borello test is the first step in determining a worker’s classification in the event of a complaint or an audit. It takes its name from a past California Supreme Court ruling.

Under the Borello test, the most significant factor is whether the hiring firm has control or the right to control a worker in terms of the work being done and the manner and means in which it is performed.

Additionally, other factors are considered, although none of them is enough on its own to determine a worker’s classification. Here’s a quick breakdown of these factors:

  1. Whether the worker is engaged in an occupation or business distinct from that of the hiring firm

  2. Whether the work is part of the hiring firm's regular business

  3. Whether the hiring firm or the worker supplies the equipment, tools, and the place for the person doing the work
  4. The worker’s financial investment in the equipment or materials required to perform the work
  5. The skill required in the particular occupation

  6. The kind of occupation—whether, in the locality, the work is usually done under the hiring firm's direction or by a specialist without supervision

  7. The worker’s opportunity for profit or loss depending on his or her own managerial skill
  8. How long the services are to be performed

  9. The degree of permanence of the working relationship

  10. The payment method, whether by time or by the job, and

  11. Whether the parties believe they are creating an employer/employee relationship.

Again, no single factor among these determines a worker’s classification. However, the first of these factors, which examines whether the individual’s work is the service or product of the firm’s primary business, is given the most weight.

Additional Criteria for B2B Contractors

For B2B contractors specifically, there are some additional criteria as well, although most of these concern the contractor and the contractor’s business rather than the employer:

  • The worker is free from the hiring firm's control and direction while performing the work (this must be set forth in the contract and be true in fact)
  • Provides services directly to the contracting business rather than to customers of the contracting business
  • Has a written contract
  • Has all required business licenses or business tax registration
  • Maintains a business location separate from the business or work location of the hiring firm
  • Is customarily engaged in an independently established business of the same nature as that involved in the work performed
  • Actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring firm
  • Advertises and holds itself out to the public as available to provide the same or similar services
  • Provides its own tools, vehicles, and equipment to perform the services
  • Can negotiate their own rates
  • Consistent with the nature of the work, can set their own hours and location of work
  • Is not performing the type of work for which a license from the Contractor’s State License Board is required.

These B2B contractor criteria apply to individuals who conduct business as sole proprietors, partners in partnerships, members of limited liability companies, or corporations.

If you hire independent workers in other job categories, such as professional service providers, accountants, lawyers, marketing professionals, and graphic designers, many of these workers are also exempted from the new California AB5 law.

To learn more about the job categories exempted from CaliforniaAB5, check out this helpful article from Nolo.com. You can also learn more about the law and its new classification requirements from Nolo here.

Learning More and Getting Advice

At Graphite, we cannot dispense legal advice, and nothing in this article should be considered as such. To ensure that your employment arrangements and contracts with independent workers contractors are compliant with applicable state and federal laws, we strongly recommend that you consult legal counsel.

You might also want to read some of our additional articles on the 10Essential Legal Rules for Independent Contracting and California’s“Seismic” Gig Economy Ruling: What You Need to Know.

As always, if you’re looking to hire a business expert and independent consultant, we’re here to help. You can search our network of over5,000 of the world’s top corporate strategists, management consultants, and experts in finance, investment banking, marketing, analytics, HR, IT and much more.Log into our website at www.graphite.comto get started.

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