CCM has recently received a number of questions from growers and packers regarding AB 5. AB 5 was signed into law by Governor Newsom and becomes effective on January 1, 2020. The law states that any worker is an employee unless the hiring entity can demonstrate that the worker is an independent contractor.
Below is a summary of the law. CCM advises growers and packers who utilize independent contractors (eg: trucking/hauling, pest control services, or hedging and topping) to seek legal counsel in order to ensure workers are properly classified.
AB 5 codifies the California Supreme Court’s April 2018 ruling in Dynamex v. Superior Court of Los Angeles which creates a presumption that a worker is an employee unless the employer can demonstrate by way of a 3-factor test, or “ABC Test”, that the worker is an independent contractor. The ABC test is applicable to provisions of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission.
A person providing labor or services for remuneration is considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is:
- free from the control and direction of the hiring entity in connection with the performance of the work;
- the person performs work that is outside the usual course of the hiring entity’s business; and,
- the person is customarily engaged in an independently established trade, occupation or business.
Unless the hiring entity can affirm that each of the three parts in the ABC test are met, the hiring entity (packer, grower, FLC, etc.) would have to reclassify currently independent contractors as employees.
AB 5 differentiates between an individual doing work for someone, and likely being issued a 1099, and a business. Business-to-business relationships are not subject to the ABC test, provided the following criteria are met:
1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by existing test adopted by the Court in Borello v Department of Industrial Relations (1989):
- 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.
Due to the complexity of this law, CCM highly recommends that hiring entities seek legal counsel to help them determine if their current contract arrangements are subject to, or satisfy the ABC test. Each contractual relationship and scenario should be assessed under the law individually.
As a reminder, CCM members receive one free hour of legal counsel with the Saqui Law Group, a Division of Dowling Aaron Incorporated.
