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What is AB5 and Who is Impacted?

ProActive Tax SolutionsTax Laws 2020 What is AB5 and Who is Impacted?
what-is-ab5

What is AB5 and Who is Impacted?

AB5 is a new statute affecting untold thousands of people in California’s gig economy. A gig worker is an independent contractor, on-call workers, contract firm workers and temporary workers. AB5 redefines the requirements necessary to be an Independent Contractor.

California State Assemblywoman Lorenza Gonzalez introduced Assembly Bill 5 and it was signed into law by Governor Newsom on September 18, 2019. It went into effect on January 1, 2020.

The law assumes that all workers are employees and can only be classified as an independent contractor if they meet a higher standard of requirements.

Essentially, AB5 codifies the California Supreme Court’s Dynamex decision that was issued in April 2018. The Dynamex opinion, examined the then-existing common law test to determine independent contractor vs. employee status as established in S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations (Borello), 48 Cal. 3d 341 (1989), specifically in the framework of the IWC’s Wage Orders. The decision rejected the longstanding Borello test.

Simply put since 1989, Borello had been the primary test of an employment relationship, known as the “right to control” test, meaning whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. What didn’t enter into it was whether or not the work was part of the regular business of the principal.

ab5-gig-economyWhat You Need to Know About the Law

Here is a little background for context.

Dynamex, a nationwide same-day courier and delivery service providing on-demand, same-day pickup and delivery services to businesses and the public, made a cost-saving decision. In 2004, Dynamex reclassified its California employee drivers to independent contractors.

They got sued by the drivers. When Dynamex lost, the court implemented a definition that went beyond the Borello standard and adopted the ABC definition of independent contractor vs. employee, defined as follows by California Labor and Workforce Development:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

What are AB5 Changes to Determine Status?

AB5 is meant to draw an even brighter line of distinction between who has a right to Independent Contractor status and who must be classified as an Employee. One receives a 1099 and the other receives a W-2.

The new law further codifies the ABC standard and raises the bar by striving to protect workers who should actually be classified as employees and makes it harder for employers to skirt the law.

If you are an individual seeking independent contractor status, for the purposes of this statute you now must:

  • Be providing services through a sole proprietorship or other business entity,
  • Possess a business license in addition to any other professional licenses or permits for you to practice in your profession,
  • Have the ability to negotiate or set your own rates for the services provided.

lyft-uber-driveIf You Are an Employer, The Tax Implications Are Significant

That explains the aggressive pushback from companies like Uber and Lyft. They do not want to be subject to the State’s Unemployment Tax and Training Tax, not to mention the employer portion of Social Security and any Health Insurance and Retirement benefits.

The changes contained in AB5 were meant specifically to protect gig workers and individuals in lower wage positions, from employers who were seen to be taking advantage of them.

As noted above, employers are filing lawsuits but so are workers who want to remain independent contractors.

What’s Next?

The California Trucking Association filed a federal lawsuit against AB5 in November 2019, close to the same time of the Uber and Lyft lawsuits. The association stated that 70,000 independent truckers, who’ve made large investments to own their own trucks, especially the cleaner emission trucks, might abandon their $150,000 to $250,000 investments and lose their ability to set their own schedules.

The difficulty here is that a trucking company and the truck drivers are in the same business – transportation.

Add to that, the fact that many drivers only drive for one trucking firm rather than being able to show they are a business with other clients.

Yet, even truckers are divided. Port truck drivers have, in the past filed complaints with the state of California stating they feel exploited as independent contractors and don’t want the burden of huge truck payments.

On January 16, 2020 the U.S. Southern District Court granted a preliminary injunction which blocks the State of California’s enforcement of AB 5 against motor carriers.

If you are among the variety of gig workers impacted by AB5 you may be wondering why some workers are exempt and others are not.

Musicians, court reporter transcriptionists, speech therapists, journalists, photographers, special ed teachers, dancers, consultants and speakers only found out in January about the changes and some have lost their jobs, among them freelance writers. The confusion runs deep, especially on the topic of exemptions.

Some individuals are exploring the option of forming an S Corp to become an entity that would be considered to have its own operating authority, per California’s definition. Others are discovering that they are exempt.

dentist-ab5Who is Exempt?

Dubbed as a reform for the gig economy, AB5 has gig workers strongly divided about the benefits, as the trucker dilemma illustrates. In fact, lobbying efforts began early for some professional exemptions to the law and the list of exemptions continues to grow.

According to an article in the Sacramento Bee, Lorenza Gonzalez, the San Diego Democrat said, “By and large, the exempted professions under this bill tend to operate with significant autonomy and bargaining power in the workplace. In other words, most of these folks make over twice the minimum wage, which is our standard in existing law for any individual to be exempted from overtime and meal and rest period requirements.”

Those exempted professions usually won their exemption based on these factors, as well. They set or negotiate their own rates and communicate directly with clients/customers. They include most:

  • Physicians
  • Dentists
  • Podiatrists
  • Psychologists
  • Veterinarians
  • Accountants
  • Lawyers
  • Engineers
  • Stockbrokers
  • Insurance agents
  • Real estate agents
  • Direct sellers
  • Hairstylists and barbers
  • Aestheticians
  • Travel agents
  • Architects
  • Private investigators
  • Marketing professionals
  • Graphic designers
  • Fine artists
  • Grant writers
  • Enrolled agents
  • Payment processing agents
  • Repossession agents
  • Commercial fisherman and
  • Human resources administrators.

There are exceptions (not full exemption) for photographers, photojournalists, freelance writers, editors or newspaper cartoonists who make 35 or fewer submissions a year, as well as for some types of business-to-business activities.

It is important to note that over the next year or so, these exemptions may be added to or changed in some way. In fact, Assemblywoman Gonzalez, on January 6, 2020 introduced AB1850, an act relating to employment, perhaps to address some of the confusion around the unintended ramifications of AB5. Individuals are encouraged to contact her office with clarifying suggestions and individual stories of consequences.

How Do You Keep Up With The Changes?

A good source site to track changes is the California Labor and Workforce Development, Rights section.

For a deeper dive into the topic, the following information from their site may prove helpful.

ab5-summaryTo Summarize: What AB5 is All About

Occupations where the Borello test applies instead of the ABC test under Labor Code section 2750.3:

  • Certain licensed insurance agents and brokers
  • Certain licensed physicians, surgeons, dentists, podiatrists, psychologists, or veterinarians
  • Certain licensed attorneys, architects, engineers, private investigators and accountants
  • Certain registered securities broker-dealers or investment advisers or their agents and representatives
  • Certain direct salespersons
  • Certain licensed commercial fishermen (only through December 31, 2022 unless extended by the Legislature)
  • Certain newspaper distributors or carriers (only through December 31, 2020 unless extended by the Legislature)

Occupations or contracting relationships where Labor Code section 2750.3 requires that additional requirements must first be met in order to use the Borello test instead of the ABC test:

  • Certain professional services contracts for marketing; human resources administration; travel agents; graphic design; grant writers; fine artists; enrolled agents licensed to practice before the IRS; payment processing agents; still photographers/ photojournalists; freelance writers, editors, or newspaper cartoonists; licensed barbers, cosmetologists, electrologists, estheticians, or manicurists (manicurists only through December 31, 2021). Borello applies to determine whether the individual is an employee of the hiring entity if initial requirements are met.
  • Certain individuals performing work under a subcontract in the construction industry, including construction trucking (with certain specific conditions applicable to construction trucking only through December 31, 2021). Borello and Labor Code section 2750.5 apply to determine whether the individual is an employee of the contractor if initial requirements are met.
  • Certain service providers who are referred to customers through referral agencies to provide graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning or yard cleanup. Borello applies to determine whether the service provider is an employee of the referral agency if initial requirements are met.
  • Certain individuals performing services pursuant to a third party’s contract with a motor club to provide motor club services. Borello applies to determine whether the individual is an employee of the motor club if initial requirements are met.
  • Certain bona fide business-to-business contracting relationships. Borello applies to determine whether the business providing services is an employee of the business contracting for the services if initial requirements are met.

For two specific industries, special rules under Labor Code section 2750.3 require examination under the Business and Professions Code:

  • Certain real estate licensees, for whom the test of employee or independent contractor status is governed by section 10032(b) of the Business and Professions Code. (If that section is not applicable, then Borello is the applicable test for purposes of the Labor Code, except ABC will be the applicable test for purposes of workers’ compensation as of July 1, 2020.)
  • Certain repossession agencies, for which the determination of employee or independent contractor status is governed by Section 7500.2 of the Business and Professions Code.

The exemptions from the ABC test for certain industries, occupations, or contracting relationships may involve some complicated rules and criteria which are not set forth above. Employers and workers should seek independent advice and counsel if they have questions about the applicability of any exemption to their particular case.

Help with AB5 and Your Taxes is Available in the Bay Area 

If you would like tax planning information for the new year as it relates to AB5, please give our Corte Madera office a call at 415-924-6240.