What Agricultural Employers Need to Know About Assembly Bill 5 and Its Exceptions
By: McKague Rosasco LLP on October 17, 2019
California law concerning independent contractors is about to go through a major transition. On September 18, 2019, Governor Newsom signed Assembly Bill (AB) 5, a law creating new standards for classifying workers as independent contractors instead of employees. All agricultural businesses should consider how Assembly Bill 5 may impact their operations.
The ABC Test
Before AB 5, the distinction between employees and independent contractors was governed by a flexible balancing test. When AB 5 goes into effect on January 1, 2020, the ABC test adopted by the California Supreme Court in Dynamex v. West, Inc. v. Superior Court will become the standard for nearly all purposes. Under the ABC test, a person working for pay shall be considered an employee, and not an independent contractor, unless the hiring entity demonstrates all three of the following:
A) that the worker is free from the control and direction of the hirer in connection with the performance of such work and in fact;
B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
(Proposed Labor Code 2750.3(a)(1).) Many of the services agricultural contractors provide are closely related to the hiring entity’s primary business. For example, vineyards and wineries regularly secure the services of winemakers, viticulturists, and other consultants. As viticulture is closely related to the usual course of a vineyard’s business of growing grapes, a viticulture contractor who does not qualify for the business-to-business exemption could be considered an employee under the ABC test.
AB 5 may impact many of the independent contractors agricultural businesses employ, e.g. winemakers and crop management consultants. News coverage and commentary on AB 5 has largely concentrated on the bill’s significance for individuals who work as independent contractors. Much less attention has been given to AB 5’s impact on business entities working as independent contractors. Luckily, formally organized independent business-to-business contractors may qualify for an exemption from AB 5. If a contractor does not qualify for one of the exemptions under AB 5, their status will be determined by the ABC test established by the Dynamex decision.
AB 5 states the ABC test “shall apply retroactively with regard to wage orders of the Industrial Welfare Commission and violations of the Labor Code relating to wage orders.” (Proposed Labor Code section 2750.3(h)(1)-(2).) Fortunately, AB 5 also states all of its exceptions apply retroactively as well. (Id.)
AB 5 provides that the ABC test will only apply for purposes of the Unemployment Insurance Code “to work performed on or after January 1, 2019.” (Proposed Labor Code section 2750.3(h)(3).) As for workers’ compensation, AB 5 states the ABC test will not apply retroactively and will not go into effect until July 1, 2020. (Proposed Labor Code section 3351(i).)
The Business-to-Business Exception
The scope of the exception for business-to-business contractors is not clear and the relevant text of AB 5 is self-contradictory. AB5’s exception for business-to-business contractors maintains the common law test for independent contractor status under S.G. Borello & Sons, Inc. v. Department of Industrial Relations – i.e. the standard for 29 years before the Dynamex decision. (Proposed Labor Code section 2750.3(e)(1).) Independent contractors who operate a formally organized business are likely to satisfy these twelve requirements. Under AB 5, a business-to-business contractor is exempt from the ABC test if the contracting business meets all twelve of the following criteria:
(A) 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.
(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.
(C) The contract with the business service provider is in writing.
(D) 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.
(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.
(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(G) 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.
(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
(I) The business service provider provides its own tools, vehicles, and equipment to perform the services.
(J) The business service provider can negotiate its own rates.
(K) Consistent with the nature of the work, the business service provider can set its own hours and location of work.
(L) The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.
(Proposed Labor Code section 2750.3(e).) Agricultural businesses that engage business-to-business contractors should undertake due diligence to verify whether their contractors can satisfy the requirements for exemption from AB 5. Under AB 5, the contracting business carries the burden of demonstrating the business service provider can satisfy all twelve criteria.
The scope of the business-to-business exemption from AB 5 is not at all clear when it comes to independent contractors who operate as a sole proprietorship. While the text of the bill states the exemption may apply to "a business entity formed as a sole proprietorship," it also says the exemption "does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a contracting business." This ambiguity raises the question of whether sole proprietors offering business-to-business contracting may benefit from the business-to-business exemption even if they meet all twelve criteria above.
The Professional Services Exception
AB 5 contains a separate exception for independent contractors providing professional services. This exception only applies to seventeen specific occupations. (Proposed Labor Code section 2750.3(c)(2)(B).) The listed professions most relevant to agricultural employers are marketing and human resources.
To be exempt from AB 5, marketing services work must be “original and creative in character and the result of which depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the contracted work.” (Id.) Work done by an independent human resources administrator must be “predominantly intellectual and varied in character and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.” (Id.)
In addition, professional services are only exempt from AB 5 where the hiring entity demonstrates the following criteria are met:
(A) The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity. Nothing in this subdivision prohibits an individual from choosing to perform services at the location of the hiring entity.
(B) If work is performed more than six months after the effective date of this section, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in their profession.
(C) The individual has the ability to set or negotiate their own rates for the services performed.
(D) Outside of project completion dates and reasonable business hours, the individual has the ability to set the individual’s own hours.
(E) The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.
(F) The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.
(Proposed Labor Code section 2750.3(c)(1).) An individual may provide qualifying professional services through a “sole proprietorship or other business entity.” (Proposed Labor Code section 2750.3(c)(2)(A).)
Misclassifying an employee as a contractor can expose a business to significant liability for wage and hour claims, employee benefits, unemployment insurance, and worker’s compensation. Vineyard management companies and farm labor contractors will continue to be viewed as independent contractors. However, you need these agreements to be in writing. Agricultural employers who contract with individual independent contractors and business-to-business contractors should review these relationships with counsel to ensure their practices comply with the new standards under AB 5 going into effect on January 1, 2020.