California Governor Newsom signed Assembly Bill 5 (AB 5), which changes the test used to determine if a worker is an employee or an independent contractor, and added several exceptions and clarifications, including a specific exception for licensed architects. AB 5 went into effect on January 1, 2020.
In April 2018, the California Supreme Court created a new three-part test to establish whether a worker is an employee or independent contractor with its decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles. Previously, courts used a test from an older case, S. G. Borello & Sons, Inc. v. Department of Industrial Relations, which weighed a range of factors to determine worker classifications. In Dynamex, the Supreme Court introduced a simpler, three- element “ABC” test. AB 5 now applies that test to all provisions of California’s Labor Code and Unemployment Insurance Code. Under the test, California presumes any person providing labor is an employee, unless the hiring entity can prove:
If the employer cannot establish all three prongs of the ABC test, then they must classify the worker as an employee.
AB 5 does not apply to out-of-state workers. Only individuals performing work inside California are subject to the ABC classification test and under the jurisdiction of California labor laws.
The law specifically exempts certain occupations from the ABC test of AB 5. Notably, an individual who holds an active license from the State of California and is a practicing architect, engineer, lawyer, private investigator or accountant is exempt. Since AB 5 does not apply, an employer would use the older Borello test to determine if the licensed professional should be classified as an employee or independent contractor.
To address confusion in AB5, Governor Gavin Newsom then signed AB 2257 into law on September 4, 2020, which immediately changed the law governing whether a business can form an independent contractor relationship with another business. AB 2257 creates a business-to-business exemption to the Dynamex test, meaning the easier-to-meet Borello test applies.
It is important to note that this exception only applies to licensed individuals, not someone generally working in the profession.
A solo practitioner with an LLC who works full time for a company just like one of the company’s employees will likely be classified as an employee; the law treats the idea that the two are separate and independent business entities as a sham meant to avoid employment laws. Fortunately, the law recognizes that bona fide separate businesses can maintain an independent contractor relationship.
The business-to-business service provider exception requires a written contract and that the business service provider:
In sum, the exception generally allows an architectural firm to hire a business to provide some of the more traditional independent contractor services, like a sub-consultant engineering firm or certain be exempt from AB 5.
The other important exception to AB 5 is the “professional services” exemption. For purposes of this law, “professional services” defined in Labor Code Section 2750.3 (c) (2)(B) as services for marketing involving original and creative content, graphic design, fine art and photography, and administration of human resources, as well as some other limited artistic or technical work.
Individuals providing professional services are exempt from AB 5 when the individuals perform the specified work under the law and:
An important difference between the professional services exception and the business-to-business exception is that the entity providing the professional service can be an individual. The professional services do not need to be provided through a business entity. The business-to-business exception requires the service provider be a business of some form as the name suggests.
When AB 5 does not apply, an employer instead applies the old Borello test to determine if the worker is an employee or independent contractor. The Borello test looks at the entirety of the relationship and assesses the overall “economic realities,” which is more subjective than the ABC test. The most significant factor is if the company has control (or the right to control) the worker both as to the work done and the manner and means in which the work is performed. Essentially, does the employer control the means and methods of the worker, or is the employer only focused on the final product? It also considers additional factors (depending on the issue involved), such as:
The Borello test does not automatically make an individual an employee based on one fact or factor. Instead all factors are balanced and weighed against each other to determine if a worker is an employee or independent contractor based on the “economic reality” of their relationship. This is different from the ABC test and the various exceptions to AB 5 which require the employer to establish all three elements of the test in order to classify the worker as an independent contractor. Below are some examples to show how these tests apply and work together.
An architectural firm hires a drafter to assist with CAD drafting. The firm already employs a drafter but needs someone else for temporary, overflow work. The firm contracts with a drafter to pay her for completed CAD files. The drafter works from home and usually completes several CAD files a week, spending between 20 and 30 hours a week working for the firm. The drafter is free to set her own hours and schedule so long as she meets deadlines. The firm does not prohibit the drafter from working for other architects, but she ends up exclusively working for the firm, does not have her own drafting business, and does not solicit work from anyone else.
Here, the drafter is not a licensed professional or business, nor providing “professional services” as defined by AB 5, therefore the ABC test applies. The first question is A: whether the drafter is free from the control and direction of the firm in connection with the performance of her work, both under the contract and in fact. In this scenario, the drafter is free from the control and direction of the hiring entity because she is providing completed files without any direct supervision or control, she works from home and sets her own hours and schedule, and she is free to work for other architects.
The next element is B: does the person perform work outside the usual course of the hiring entity’s business. The drafter performs work in the course of the firm’s business. Drafting plans and CAD files is a common part of an architecture firm’s business, and the firm directly employees a drafter, confirming drafting is part of its usual business. This element alone establishes the drafter as an employee under AB 5. It does not matter if the third element is met or not, since an employer must show a worker meets all elements to qualify as a non-employee.
However, the third element would also likely establish a separate reason why the drafter is an employee. Element C asks if the person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. Here, drafter is not engaged in an independently established business. The drafter works exclusively for the firm and no one else. Further, she is working directly with the firm as an individual and does not have her own drafting business, an LLC, or corporation. A court would not likely find that she is engaged in an independently established trade or business.
Since element B is not met and it is unlikely that element C is met, the law classifies the drafter as an employee of the firm. If the firm classified the drafter as an independent contractor and the drafter brings a claim for misclassification, the firm could be liable for wage and hour violations, unpaid overtime, missed meal and rest breaks, and penalties for improper wage statements.
A small architecture firm hires an HR consultant to handle all of its HR needs. The consultant works from home but goes to the firm’s office from time to time for meetings. The consultant sets his own hours and works for a few other small companies as an HR consultant. The firm pays the consultant an agreed upon hourly rate that the consultant has increased every other year the past five years. The consultant has a business license.
Here, the HR consultant would likely be exempt from AB 5 since the employer can show that he is performing a professional service. He works from a separate location, sets his own hours and rates, does business with other companies, exercises discretion and independent judgment in his work, and is properly licensed. The consultant complies with all six necessary requirements for the “professional services” exception to apply.
But this only determines that the consultant is exempt from the ABC test under AB 5. The analysis must continue to the Borello test. The Borello factors also establish the consultant is an independent contractor. The firm is primarily concerned with the consultant’s advice, not his methods. Furthermore, the consultant works from home and is performing a specialized task outside of the ordinary business of the architectural firm. He also sets his own rates and hours and works for other companies. While the ongoing relationship may suggest the consultant is more like an employee, a court will balance all the relevant Borello factors, and in this case there are far more factors that weigh in favor of finding the consultant to be an independent contractor.
An architecture firm contracts with a licensed architect to assist with overflow work. The architect works from home but uses a laptop and software license supplied by the firm. The architect must follow the procedures and practices established by the firm for both creating plans and performing administrative tasks. The firm has also asked the architect to follow its handbook. The architect is paid hourly with a rate set by the firm offered on a “take it or leave it” basis and rejected her one request for an increased rate of pay. The architect has worked for the firm for two years. She can work for other architect firms but does not due to the steady stream of work. The architect has a personal website advertising her services but otherwise does no active marketing for clients. Both the architect and firm believe they created an independent contractor relationship.
Here, the licensed architect is exempt from the ABC test because she is a licensed architect. The law applies the Borello test to determine if the architect is an independent contractor or employee.
The factors supporting an independent contractor relationship are: 1) both parties believed they were creating an independent contractor relationship; 2) the architect works from home; 3) the architect is free to work for other architecture firms; and 4) the architect has her own website advertising her services.
The facts supporting an employment relationship are: 1) the architect must follow the procedures and practices of the firm; 2) the architect only works for the firm and has for two years; 3) the architect does not actively advertise her services; 4) the architect is paid hourly with a rate set by the firm that the architect has little power over; 5) the architect uses tools supplied by the firm; 6) the architect has little chance of profit or loss by her managerial skills as she simply does whatever project the firm gives her; and 7) the work done is part of the firm’s regular business.
This is a tougher case, but a court balancing the Borello factors is more likely to find that the architect is an employee – even though the ABC test does not apply. The firm is concerned not only with the end product of her work, but also with the means and methods used and her compliance with its practices and handbook. If the firm paid the architect a flat fee (giving her the chance to profit from her skillful work), she used her own equipment, she does not follow the firm’s procedures, and the architect worked with several other firms and contracted directly with clients to design her own projects as well, the Borello analysis would fairly clearly classify the architect as an independent contractor.
How does AB 5 affect architectural consultants such as civil, structural, and MEP engineers?
An engineer licensed by the state of California providing engineering related services is exempt from AB 5. Under the Borello test, a specialized consultant hired to provide work on a specific project will be classified as an independent contractor, absent any unusual circumstances.
What if my consultant is not a licensed professional – like a plan expediter, cost estimator, or QA/QC expert?
If a consultant is not a licensed architect or engineer, then the business-to-business exemption to AB 5 may apply. However, if a consultant cannot meet all the elements of that exemption, the safest course of action is to apply AB 5. If the business-to business exemption does apply, the employer must then apply the Borello test to determine if the consultant is truly an independent contractor under the economic realities of the relationship.
I am a licensed architect and provide a wide range of consulting service, including advocacy, meetings with public officials, and facilitating development. Does the exception to AB 5 only apply to typical architectural services like preparing a set of plans?
A licensed architect must be “practicing” in their profession to qualify for the exemption from AB 5. How the courts will determine that language remains unclear, but California Business and Professions Code section 5500.1 defines the practice of architecture as “professional services which require the skills of an architect in the planning of sites, and the design, in whole or in part, of buildings, or groups of buildings and structures.” It also notes an architect’s professional services may include “any or all of the following:
Therefore, if an architect is acting as an expert at a government hearing or providing consultation on development advice and general planning, the architect likely would be exempt from AB 5.
Furthermore, the consultant may also qualify for the business-to-business exemption.
If I do not qualify for an exemption under AB 5, can I still invoice for my time?
Yes. AB 5 is just a method to determine if a worker should be classified as an employee or an independent contractor. If an employer retains you and you provide services, you are entitled to payment (and vice versa). However, if a worker is found to be an employee under AB 5 or under the Borello test, the employer must still pay the worker the agreed upon rate, and the employer may have additional payment and record keeping obligations (such as for overtime pay and other employment benefits).
While AB 5 attempts to simplify the classification question by applying the more straightforward ABC test to the entire Labor Code, AB 5 still places the burden on employers to assess the facts around each worker to determine if someone is a bona fide independent contractor. The many exceptions also create opportunities for good-faith mistakes. It is important to remember that the default status of a worker is that they are an employee and the hiring entity will have to prove exceptions apply, so if in doubt, there is less risk involved with classifying a worker as an employee at the outset.
Courts will likely take a pro-employee stance in interpreting AB 5 and in close cases find the worker is an employee. Both the legislature in AB 5 and Court in the Dynamex case that first established the ABC test were concerned about hiring entities exploiting workers and dodging tax responsibilities. AB 5 explicitly states its purpose is to restore millions of workers with the workplace to rights they have been denied by being misclassified.
The Court already created the ABC standard in the Dynamex case, and while there has been no interpretation of AB 5 yet (since it will go into effect on January 1, 2020), the Court has interpreted Dynamex. In Garcia v. Border Transportation Group, the Court found a taxi driver should be classified as an employee because the employer could not establish element C of the ABC test. The employer did not prohibit or prevent the worker from engaging in another business, but the worker was dependent on the employer for his taxi permit and did not have the ability to operate on his own. The Court noted that it is important to ask if the worker independently “made the decision to go into business for himself” and “takes the usual steps to establish and promote his or her independent business – for example, through incorporation, licensure, advertisements, routine offerings to provide services of the independent business to the public or to a number of potential customers, and the like.”
With civil penalties of $10,000 to $25,000 for each misclassified worker, potential liability for back wages, and pro-employee courts, it is wise to take a cautious and conservative approach in applying AB 5 until the courts provide further clarification and guidance of the proper way to apply the law and its exceptions.
Contact us to discuss further:
Ryan J. Kohler
David A. Nauss
Nothing contained in this article should be considered legal advice. Anyone who reads this article should consult with an attorney before acting on anything contained in this or any other article on legal matters, as facts and circumstances will vary from case to case.
