While AB 5 prevents companies from hiring “gig economy” workers as independent contractors, the business-to-business exemption for businesses contracting with one another can work if you satisfy its many requirements.
If you are a “gig” economy worker in California, you may find the hiring company asking a lot more questions since the passage of AB 5. AB 5, which became effective in California on January 1, 2020, redefined the decades old test to determine whether a person is classified as an employee or an independent contractor. AB 5 makes it more difficult to classify workers as independent contractors by requiring that, to be a contractor, in addition to the historical test of being free from the control of the hiring company, now the worker must also perform work that is different to the work performed by the hiring company. Therefore, a company cannot hire contractors that do the same type of work as their employees.
Businesses frequently use independent contractors for overflow work at peak periods, or as an integral part of their business in the case of gig economy companies such as Uber, Lyft, or Doordash where all the drivers are contractors. These companies would face steeply increased costs under AB 5, since the expenses associated with employees are much higher than contractors. For employees, unlike contractors, the employer needs to pay employment, social security, and Medicare taxes, provide workers’ compensation insurance, and comply with minimum wage laws.
Business-To-Business Relationships Exemptions
While Uber has challenged the constitutionality of AB 5 in court, there are various exemptions in AB 5, one of which is for business-to-business relationships. There are many requirements to satisfy for a contractor to meet this exemption, including:
- The contract occurs between two business providers and not any individual
- The service provider is free from the control of the hiring business
- The service provider provides the service directly to the hiring business rather than its customers
- The contract is in writing
- The service provider has the appropriate licenses
- The service provider has other clients
- The service provider holds itself out to the public as providing the same services
- The service provider provides its own equipment
- The service provider can negotiate its own rates
- The service provider can set its own hours and work location
Most likely to be problematic for service providers are the requirements that they provide their services to other clients – not just the hiring party – and that the services are provided directly to the business rather than the business’ customers. While these requirements will present obstacles to a service provider who was previously hired by a single company, the exemption can work for those who meet the above requirements.
If you require any further information about AB 5, please contact Edward Grenville, Managing Shareholder, Inspire Business Law Group, PC (egrenville@inspirelawgroup.com; +415 279 0779; www.inspirelawgroup.com).
This article is provided for educational and informational purposes only and is not intended to be, and should not be construed as, legal advice.