This is the second in a multi-part series providing the basics of AB5 and how it fundamentally changes labor relations in California. The following is not legal advice and instead is intended to provide general information about AB5.
The first article in our AB5 Basics series explained who AB5 affects and provided some information about the mechanisms for its enforcement. You learned that AB5 targets hiring entities, and requires them to demonstrate that three particular things about the relationship between themselves and a worker are true in order to legally classify that worker as an independent contractor.
In this article, we’ll take a close look at what those three particular things are and why many freelancers, creatives, and small businesses are scratching their heads trying to figure out how to comply.
Here, we’ll start with the text of the ABC test. Behold, my friends. Here is the law that “The People” passed on January 1, 2020:
Subparts (A), (B), and (C) are the three conditions that must be true in order for a hiring entity to legally engage a worker as an independent contractor. The first disappointing thing that you may notice about the ABC test is that there isn’t anything in each of the three subparts that stands for the “A,” the “B,” and the “C.” So if you were looking for a three-word ABC mnemonic to take away from this article, sorry to disappoint. The mnemonic is something more like “control, usual course, customarily engaged," which is not a very useful mnemonic.
In any case, let’s pause here for a second and reflect on this text. In an ideal world, all laws — especially laws that affect over a million people with no formal legal training and no access to affordable legal assistance — would be written in a way that allowed them to be easily understood by the average person. So I invite you. Go ahead and think about the people and entities to whom you pay money for labor or services over the course of a year. The people and entities you pay are the “person” in the text of the law above, and you are the "hiring entity." Which of the above three — A, B, and C — are true of the other person, and which are false?
All three must be true in order for you to legally engage that person as an independent contractor. If any one of them is false, it is illegal to engage that person as an independent contractor.
Where this test came from and why we have so little guidance on what it means is the subject of a future article. For now, we have precious little guidance from courts and regulatory agencies about exactly how to apply the ABC test to different types of working relationships. There is some guidance from the California Employment Development Department, so let’s see if it helps us clarify whether our business relationships pass the ABC Test.
Part A: free from the control and direction of the hiring entity
In order to legally engage a worker as an independent contractor, the worker must be “free from the control and direction of the hiring entity in connection with the performance of the work.” When we read this definition, the following questions immediately come to mind, in more or less the following order:
(1) What does it mean for the hiring entity to “control” or “direct” the worker?
(2) Where is the line when the hiring entity ceases to exercise enough control or direction such that the worker becomes “free” from it?
(3) And what does it mean to be free from control and direction “in connection with the performance of the work?” Is that the same thing as being free from control and direction when actually performing the work, or is it something broader?
The EDD has provided a FAQ which purportedly clarifies each part of the ABC test. On prong A, the FAQ provides the following. Following each bullet point, I have provided a restatement of the quote in equivalent language.
We do not believe it is an exaggeration to say that the EDD’s guidance thus far on part A of the test amounts to an absolute logical nullity. This leaves us in a position without any guidance from the EDD, and no court cases less than 75 years old interpreting or applying part A. The ABC test was only resurrected in 2018 when the California Supreme Court adopted it for a particular, narrow purpose. The result is that each of us has to look at our business relationships and decide for ourselves if the person we are hiring is “free from the control and direction of the hiring entity in connection with the performance of the work.”
Consider, in light of the foregoing, whether the following common scenarios would pass part A of the ABC test:
We submit that one of the foundational problems with AB5 is that, under a strict reading of its text, each and every one of the above situations would fail part A, and accordingly each of the labor relationships in the above examples would be required to be a formal employment relationship. The problem is that no one knows whether the EDD representative or judge that might one day review one's case will interpret prong A strictly or leniently. This is a major part of why hiring entities have ceased to engage contractors in California since January 1, 2020: every one of their contracts might be an AB5 violation, and it’s much safer to take business elsewhere than to keep doing business in California and risk a potential assessment of fines that can quickly add up to millions of dollars for even modestly-sized companies.
Part B: Outside the usual course of the hiring entity’s business
Part B of the ABC test provides that in order to legally engage a worker as an independent contractor, the worker’s work must also be “outside the usual course of the hiring entity’s business.” As to Part B, the EDD has provided admittedly better substantive guidance. For example, says the EDD, when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, those cake decorators are doing work that is part of the bakery’s usual course of business. By contrast, when a clothing store hires an outside plumber to repair a leak in a bathroom on its premises, the plumber is doing work that is outside the usual course of the hiring entity’s business, because the hiring entity’s business is selling clothes, not repairing pipes.
The entertainment and performing arts industries stare in horror at the imposition of Part B on California labor relationships because in so many cases where a producer or arts organization engages various individuals to take part in the mounting of a film, performance, or production, those individuals appear to be doing work within the usual course of the producer's or arts organization's business. The producer’s or arts organization’s usual course of business is delivering arts and entertainment, and, like, the bakery that hires the cake decorators to work on certain parts of certain cakes, actors, musicians, dancers, stagehands, designers, writers, film crews, and editing crews all provide their services as part of the overall production -- and that production is very much within the course of business of a producer or an arts organization.
There are other gray areas in freelance industries that the EDD’s guidance and available legal precedent do not seem to resolve. An oft-asked example is the one in which the local band or jazz combo provides live music at the local restaurant once a week. Labor attorneys who may have become accustomed to defending such contractors under the previous Borello standard will quickly declare that the usual course of business of a restaurant is preparing and serving food, and since the band is not preparing or serving food, the band is doing work outside the course of the restaurant’s business, so the band members are contractors, there is no misclassification, and that’s the end of it.
But not so fast. Are you certain that the usual course of the restaurant’s business is preparing and serving food? Many restaurants pride themselves on much more than just the taste of their food, and they market themselves as providing a complete experience for their guests, of which the food is just a part. Could it be argued that the course of a restaurant’s business is providing an overall hospitality experience for their guests, and that the musicians, which they hire regularly, are part of that experience?
What if the restaurant advertises the band on TV and in print as the restaurant’s staple offering every Thursday night? What if the restaurant is a 50’s old-time diner and they engage in a doo-wop group to perform there every night to delight their guests and create a more immersive experience?
These are not rhetorical questions. These are questions that an EDD representative or a judge is going to have to one day assign a “yes” or an “no” answer to. And since there are reasonable minds who fear the answers could require an employment relationship, many businesses are concluding that the only way to comply is to either make their workers employees or terminate those relationships. And since the last thing a restaurant, which already works on impossibly small margins, needs is four more part-time employees on their payroll, restaurants will likely choose to play recorded music rather than risk the consequences of non-compliance. Similarly, lone freelancers who have neither the time nor the expertise to complete piles upon piles of onerous employment forms to stay in compliance are left with their hands tied, unsure of how to engage other freelancers in their endeavors without drawing the ire of the state.
Part C: Customarily engaged in an independently established trade, occupation, or business of the same work type
Part C appears to be the least discussed of the three, but we believe it holds another set of logical absurdities that could eventually be used to mount a legal challenge against AB5. In order to legally engage a worker as an independent contractor, the final requirement is that worker be “customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
The immediate goal of Part C is relatively obvious. Part C is trying to prevent a situation where a contractor’s relationship with a particular hiring entity becomes so constant and pervasive that the contractor is effectively working solely and exclusively for the hiring entity. In such a case, AB5 says, the hiring entity is required to bring the worker on as an employee because the worker is at that point no longer customarily engaged in an independently established trade.
But, in keeping in the spirit of this article, let’s look a bit further beneath the surface. Part C requires the workers to be “customarily” engaged in a separate business doing the same kind of work. We read “customarily” as the equivalent of “usually,” and we read Part C to simply mean that the worker must regularly do that same kind of work for other hiring entities. The EDD guidance flatly states that if an individual's work relies on a single employer, part C is not met, which we believe is another equivalent statement of the rule.
That said, let’s examine three scenarios and see what Part C of the ABC Test has to say.
We submit that Part C of the ABC test creates these additional absurdities, and that this overall lack of clarity continues to create unnecessary but very real risk to the entirety of California’s freelance, creative, and small business communities. (Future articles will examine where the ABC test came from, what we used to have before the ABC test, and will provide further details about why the test, as it is written, is void for vagueness.)
What does pass the ABC test?
As restrictive as the ABC test is, there are certain occupations and work relationships that will pass the ABC test. For example, a parent engaging a flute teacher to provide piano lessons for their child will arguably not violate the ABC test by paying that flute teacher as an independent contractor. The parent has little say in how the lessons will be conducted (Part A); the parent's business is childrearing, not flute teaching (Part B); and the flute teacher presumably teaches a few other students as part of a business (Part C). However, if that flute teacher herself ever pays an accompanist to accompany her students on a recital featuring her students' performances, part B and arguably part A of the test would require the flute teacher to engage the accompanist as an employee, even if only for one afternoon in an entire calendar year. Thus, even though there are certain particular types of work relationships that may continue as independent contract relationships under AB5, there are few professions that are not somehow affected by the restrictions AB5 places on our ability to engage each other for labor or services.
California law now dictates that any worker who fails any one of the three parts of the test above must be engaged as an employee and cannot be engaged as an independent contractor. There are two major exceptions to this general rule. These exceptions are called the business-to-business exemption and the professional services exemption and they will be the subject of the next two articles in this series. Without sounding defeatist, we recommend not getting your hopes up: these exemptions are stringent and only particular occupations qualify.
If you're concerned, energized, or frustrated by AB5, please sign up for our email coalition and join our Facebook group where we will be coordinating specific, scaled action items to raise awareness and get our lawmakers' attention.
TPVAB5 is a lawyer and freelance musician in Los Angeles. A lifelong Democrat, he was brought into this fight by AB5 and by the realization that politicians on both sides of the aisle are beholden to special interests.