New California AB 5 Law











By: Scott Turner

Date: December 2019


By now, I am sure you have heard about the new independent contractor legislation signed by Governor Newsome on September 18, which will be effective January 1, 2020.


For the vast majority of my clients (service-based businesses and health professionals), there is NO EFFECT due to a Category 1 exemption.


In a nutshell, it means the following to you:


For health professional corporations and individuals:

Compensation to Locum, part-time, and fill-in licensed physicians or their entity can continue to be paid in the form of independent contractor payments inasmuch as you are exempt from the new rules


For unlicensed workers, the same independent contractor rules under a court case called “Borello” still apply, and in the same manner as applied prior to this AB 5 legislation


For builders and contractor corporations and individuals:

Compensation to full-time or part-time licensed contractors or their entity can continue to be paid in the form of independent contractor payments inasmuch as you are exempt from the new rules


For unlicensed workers, the same independent contractor rules under a court case called “Borello” still apply, and in the same manner as applied prior to this AB 5 legislation


For lawyers, architects, engineers, insurance, accountants, real estate agents, and hair stylists, as entities and as individuals:

Compensation to full-time or part-time licensed individuals or entities can continue to be paid in the form of independent contractor payments inasmuch as you are exempt from the new rules


For unlicensed workers, the same independent contractor rules under a court case called “Borello” still apply, and in the same manner as applied prior to this AB 5 legislation

The following link is to a blog that has a concise and great explanation:


https://www.dwt.com/blogs/employment-labor-and-benefits/2019/09/california-ab5-employment-law#print


For everyone, there is a Category 2 exemption:


This exemption includes certain contractual services related to marketing, human resources, travel agents, graphic design, grant writers, fine artists, payment processing agents, still photographers, photojournalists, freelance writers, editors.


It is crucial to note that the majority these listed professional services contain specific qualifiers. The exemption for this category will apply only if the hiring entity demonstrates that all of the following six conditions are satisfied:


a. the individual maintains a business location, which may include the individual's residence, that is separate from the hiring entity's business location; 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 Jan. 1, 2020, effective date of this section, the individual must have 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


For everyone, there is also a Category 4 exemption:


Certain bona fide business-to-business contracting relationships. Subject to certain qualifiers, if a business service provider contracts to provide services to another business ("contracting business"), the exemption for this category will apply if the contracting business demonstrates that all of the following 12 conditions are satisfied:


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 Contractors State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code

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