Independent Contracting: How Dynamex Impacts You and Your Clients
The ABC Test
Many of you are aware that independent contracting laws were changed in April of 2018 when the California Supreme Court decided in Dynamex Operations West, Inc. v. Supreme Court of Los Angeles to create a new standard for classifying independent contractors in California.
The new standard is called the ABC Test, which maintains that an individual is an employee unless that individual meets all three parts of the test:
(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for 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.
For the last thirty years, the decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations was the standard used to determine independent contractor or employee status in California. Borello weighed multiple factors based primarily on the worker’s control of their time and how the worker performed the work in order to determine if the worker was an independent contractor or an employee.
The new rules of Dynamex form a much stricter test because they do not allow as much flexibility as the Borello test. Specifically, the (B) factor of the ABC Test that pertains to “the usual course of business” seems to be causing concern and confusion for independent contractors and businesses across the state.
Labor unions have praised the Dynamex decision on the basis that almost two million independent contractors in California could now become employees and would be free to organize. Labor sponsored the recent Assembly Bill 5 (AB 5) to codify the Dynamex decision by adding the new ABC Test to the California Labor Code.
The Dynamex ruling and AB 5 have now become a major concern for independent contractors and businesses in every part of the economy and throughout California. In an attempt to address some of these concerns, the legislature included a number of exemptions to the ABC Test in AB 5. CSEA, working with its lobby team at Aaron Read & Associates, was able to secure an exemption for Enrolled Agents. However, many independent contractors in other industries are not exempt and are still fighting to get an exemption. After lengthy discussion, the legislature passed, and the Governor signed, AB 5. The bill takes effect on January 1, 2020.
What does the exemption mean for Enrolled Agents?
AB 5 includes language that provides an exemption for certain “professional services.” Because of our lobbying efforts, AB 5 specifically lists the services provided by an Enrolled Agents as a “professional service” exempt from the ABC Test. The exemption allows Enrolled Agents to operate as independent contractors under the prior and more relaxed rules of Borello when the following six factors are satisfied:
(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.
If an Enrolled Agent meets all six factors listed above, then he or she may operate as an independent contractor. Additionally, nothing prohibits an Enrolled Agent from being an employee.
What do the Dynamex ABC Test and AB 5 mean for your clients?
Many groups ranging from healthcare professionals to transportation workers have not received exemptions, and therefore must meet the ABC Test in order to be considered independent contractors. Many independent contractors, and the businesses that hire them, are extremely concerned because they cannot meet this test. The legislature intends to continue work on this issue when the 2020 legislative session begins in January, and more bills will be introduced to address this issue for businesses and professions still seeking relief.
Along with listing the businesses and professionals that are exempt from Dynamex’s ABC Test, AB 5 also includes a “business to business” exemption to allow bona fide businesses to contract with each other if all of the factors below are met. AB 5 reads:
(e) Subdivision (a) and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions:
(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 Borello, if the contracting business demonstrates that all of the following criteria 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 Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.
Concerns remain that this business to business exemption is too narrow to be useful to businesses. For example, an independent taxi business owner that contracts with a larger taxi company to pick up clients dispatched by the larger taxi company may have a problem doing so, because the independent taxi business is serving the large taxi business’ clients (see (B) in the list above). Remember, items (A) through (L) must all be met for a business to contract with another business.
Going forward, you can inform your clients that the California Chamber of Commerce is spearheading a coalition and public relations effort to make further exemptions for independent contractors, and to create a broader business to business exemption. Encourage your clients and their contractors to subscribe to the Chamber’s “I’m Independent Coalition” to be kept up to date on this issue and for opportunities to join the effort.
CSEA will continue to be a resource for Enrolled Agents on the Dynamex issue. Stay tuned for additional educational opportunities on the topic and for ways to best help your clients as they struggle to adapt to the new rules.