A great deal of concern and confusion has arisen around Assembly Bill (“AB”) 5, California’s revised standard for determining whether a worker is an independent contractor or should be classified as an employee. The law which took effect on January 1, 2020, and adopts the ABC test for determining whether a worker is an independent contractor or an employee. While the ABC test strictest standard, it does not make all independent contractors employees of a flooring retailer or commercial contractor.
AB 5 Not All That New.
AB 5 essentially adopted the ABC test that the California Supreme Court began to apply over a year ago in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal. 5th 903 (2018). The Dynamex Court ruled that the ABC test was to be used to determine whether a worker is an employee or an independent contractor under the Industrial Welfare Commission Wage Orders (Wage Orders). AB 5 effectively codifies the Dynamex decision, and expands the ABC test beyond claims regarding Wage Orders to all provisions of the California Labor Code and Unemployment Insurance Code, such as workers compensation and overtime claims.
Moreover, California is not the only state to use the ABC test. It is used in some form by over half of other states, including Alaska, Arkansas, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Kansas, Louisiana, Maine, Maryland, Massachusetts, Nebraska, Nevada, New Hampshire, New Jersey, Ohio, Oregon, Rhode Island, Tennessee, Utah, Vermont, Washington, and West Virginia. While how strict the test is interpreted in these states can vary, flooring retailers and contractors in those states have worked with these requirements and have not had all independent installers declared employees. Rather, they have adjusted their operations to meet the stricter requirements. The suggestions in this article apply to any flooring dealer or contractor that uses independent contractors.
AB 5’s ABC Test.
Under the ABC test, the focus is no longer primarily on the lack of control. Rather, subcontractors, such as flooring installer, will be assumed to be employees unless the retailer or contractor can show that: (A) "The person 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;” (B) “The person performs work that is outside the usual course of the hiring entity's business;” and (C) “The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
The ABC test requires all three standards be proven. For example, if a retailer does not control the work and proves installation is not part of its usual business, the installer will still be considered an employee unless the retailer can prove the installer is an independently established business. Similarly, even if the installer is a totally separately incorporated entity that controls all of its work, the installer may be considered employees if installation is found to be part of the retailer’s usual course of business. The ABC standard is strict because it requires all three standards be met.
How the ABC Test Applies to Independent Flooring Installers.
Although the ABC test is a tough standard, it does not necessarily make all independent installers employees of a flooring retailer or contractor. To meet the test, however, the flooring retailers and contractors may need to make some changes.
First, under the “A” control part of the test, the flooring retailer or contractor must continue not to exert control over its independent installer. The adoption of the ABC test, however, will likely create more scrutiny and challenges from California agencies, unions, and the installers themselves. Accordingly, it is important to minimize any indications of control, such as supervising installation, regularly checking up and monitoring the installer’s work, or making suggestions on how to install beyond requiring compliance with manufacturer’s and industry installation standards. It should not be problem to require a status report, such as when a job was started and when it was finished, or if there were any unanticipated problems. The issue arises when the retailer or contactor becomes more involved in the actual installation on a regular basis.
The larger problem arises under the “B” part of the test regarding whether the installer “performs work that is outside the usual course” of the flooring company’s business. Flooring retailers generally provide installation of its flooring products, which could be interpreted to be part of the “usual course” of the retailer’s business. To reduce the risk, the retailer should also ensure customers can purchase flooring without the retailer providing the installation, such as cash and carry or allowing the customer to use its own installers.
It will likely be more difficult to show that the installer is an independent contractor if a retailer also has employee installers. With employees doing installation, the assumption is that installation is part of the retailer’s usual course of business. There may be legitimate reasons to use both employees and independent installers, such as meeting unexpected increase in sales, or a unique installation that requires certain expertise your employers do not have. Nonetheless, using both employees and independent installers raises the risk that the independent installers will be deemed employees under the ABC test. Accordingly, it may be prudent to limit the use of independent installers to installations that are not done by employees. If, for example, if employees only install basic carpet, the retailer or contractor may be able to justify using independent installers for all other products.
The B test may be particularly a problem for installation companies that use only independent contractors to do the installation. There is a significant risk that the work of the independent installers will be considered employees because they do the very same work that the installation company is providing. One suggestion is to ensure your independent installers are called subcontractors and are truly independent businesses as described below under part C.
Under the “C” part of the test, flooring retailers and contractors should take steps to ensure the independent installer is an independent business. First, make sure the installers are set up as an independent business, with their own federal employee identification number (“EIN”). Second, enter into a written contract with each installation company that establish they are independent and free to work for others. In an audit, the first things that are requested are the contracts with the installer and the 1099s. Not having a written contract and using an installer’s social security number on a 1099 is a sure way to find your independent contractors are considered employees. Also consider requiring the installation contractor to have all required insurance and licenses. Independent businesses buy their own insurance. Finally, independent businesses buy their own equipment and supplies; employees do not. Accordingly, do not provide any equipment or supplies to your independent contractor—they should purchase these items. It may be prudent to allow the independent installer to purchase supplies needed for installation, such as mastics, from either the retailer or from another supplier.
While there is no guarantee that these steps will ensure an installer is independent and not an employee, they may help to reduce the risk under the ABC test now in effect in California and a dozen other states.
AB 5 Has Been Challenged in Court.
There are several lawsuits challenging AB 5 and its strict ABC test. On December 31, 2019, the day before the new standard went into effect, a federal court issued a temporary retaining order preventing California from apply AB 5’s test to truck drivers. California Trucking Association, Et Al. v. Attorney Becerra (Dec. 31, 2019). The court ruled that AB 5’s standard may conflict with the federal law governing interstate commerce and trucking. The order applies only to truck drivers. While there are other lawsuits challenging the law, including suits by the share ride company Uber, the food delivery platform Postmates, and groups of freelance writers, these lawsuits have not been able to enjoin AB 5 from going into effect. In fact, in the suit file by the freelance writers, the court explicitly refused to freeze the new law from going into effect. A number of companies are also pushing a ballot measure they hope to put on next November’s ballot to exempt them from the ABC test. At the current time, however, the ABC test under AB 5 applies to flooring retailers and contractors and California companies need to ensure they comply with the standard.
AB 5 codifies the ABC test as the standard for classifying a worker as an independent contractor that was initially adopted by the California Supreme Court over a year ago in the Dynamex case. Moreover, the ABC test is not unique to California, and has previously been adopted by the majority of other states. Nonetheless, the ABC test is the strictest standard of determining whether a worker is independent or an employee, and flooring retailers and contractors may need to make some adjustments to their operations to ensure they can meet the standard.
Given the complexity of the issue and the potential cost of misclassifying employees as independent contractors, it is advisable for each contractor and retailer to consult with competent legal counsel to ensure that they meet the ABC standard.
The information contained in this article is abridged from legislation, court decisions, and administrative rulings, should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.