The California legislature recently passed assembly bill 5 (“AB 5”), which makes the recent Dynamex decision law in California. However, under AB 5, California contractors and subcontractors may be exempt from the new rules if certain exceptions apply.
Dynamex, California AB 5, and the construction industry
Last year, the Dynamex supreme court decision shook up how California determined whether a party providing work is an independent contractor or an employee. Naturally, the construction industry paid attention. After all, subcontracting out work is the norm in construction, and work arguably couldn’t get done without subs’ current employment status as independent contractors.
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Recently, AB 5 was passed in attempt at codifying that decision. However, as Garret Murai discusses on the California Construction Law Blog, the Dynamex decision didn’t affect the construction industry as much as some might think: The Unpost, Post: Dynamex and the Construction Industry. Similarly, AB 5 shouldn’t have a massive impact on the California construction industry. Rather, the bill is aimed more at the misclassification of employees in the gig economy – like Uber, Lyft, and Doordash – than it is at those in the construction industry.
Still, it’s important for those in the California construction industry to keep up with relevant laws, and considering the prevalence of independent contractors in construction, this new legislation should be monitored. With that in mind, let’s look at how California AB 5 will affect the construction industry.
When will the bill go into effect?
Currently, the bill has passed but has not yet been signed into law. However, California Governor Gavin Newsom is expected to sign the bill since he’s previously endorsed it. If signed by Gov. Newsom, AB 5 would become effective as state law on January 1, 2020.
Some construction subcontractors exempt from AB 5 and Dynamex entirely
AB 5 would amend 2750.3 of the California Labor Code. We’ll look more into the “changes’ in a minute, but there’s a crucial exception that would apply to a lot of construction subcontractors. Meaning, if the exceptions are met, the new rules under AB 5 and even the Dynamex decision wouldn’t apply. Instead, the old rule under Borello and Labor code 2750.5 would come back into play (more on that later, too).
Under 2750.3(f), construction subcontractors are exempt from the new rules if they meet all of the following criteria:
- The subcontract is in writing.
- The subcontractor is licensed by the Contractors State License Board and the work is within the scope of that license.
- If the subcontractor is domiciled in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor has the required business license or business tax registration.
- The subcontractor maintains a business location that is separate from the business or work location of the contractor.
- The subcontractor has the authority to hire and to fire other persons to provide or to assist in providing the services.
- The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided.
- The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.
Trucking companies may be exempt from the licensing requirement
Under 2750.3(f)(8), the above requirement number 2 (the licensing requirement) won’t apply to trucking companies as long as their work doesn’t require a license and as long as all of the following criteria are met:
- They’re a business formed as a sole proprietorship, partnership, LLC, LLP, or corporation.
- Their work is performed after January 1, 2020, and they’re registered with the Department of Industrial Relations as a public works contractor (even for work on private jobs).
- The subcontractor utilizes its own employees to perform the construction trucking services, unless the subcontractor is a sole proprietor, operating their own truck to perform the entire subcontract and holds a valid motor carrier permit issued by the Department of Motor Vehicles.
- The subcontractor negotiates and contracts with, and is compensated directly by, the licensed contractor.
So, if requirements 1-7 above are otherwise met by an unlicensed trucking contractor, then they’ll still be exempt from AB 5 as long at 1-4 (of this section) are also met.
AB 5 and Dynamex use the “ABC” test to determine employees vs. independent contractors
Dynamex, and now California AB 5, use what’s called the “A, B, C” test. The test goes like this: A person providing labor or services will be presumed to be an employee, rather than an independent contractor, unless the following 3 conditions are satisfied:
- (A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- (B) The person performs work that is outside the usual course of the hiring entity’s business.
- (C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
For the most part, specialty contractors and separate trades would still be considered an “independent contractor”, even under the test created by Dynamex and codified by AB 5. Of course, Section B above might provide a little cause for concern when a contractor or subcontractor subs out they might normally undertake, themselves. Still – most construction subcontractors would presumably be considered an independent contractor under this test.
As mentioned above, though, some construction subcontractors will be able to ignore this test altogether, instead looking to Borello to determine whether they should be considered an independent contractor or employee.
The Borello test should be familiar to California contractors and subcontractors
California has used the Borello test for a long time. That’s why the Dynamex decision was so jarring to the California construction industry. Unlike Dynamex, Borello provides a laundry list of factors – all of which are taken into consideration. But, no single factor is enough to prove (or disprove) whether a person should be considered a contractor or an employee. Instead, they’re all taken together and weighed against one another. Labor Code 2750.5 will also come into play.
Here are the Borello factors, taken from the California Department of Industrial Relations site:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal or alleged employer;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
- Whether the service rendered requires a special skill;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
- The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job; and
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
While the first factor is most heavily weighted, there’s a lot of wiggle room and room for argument among these 12 factors. Note, though, that under both Borello and Dynamex, there’s a presumption that the person is an employee rather than a contractor.
Analysis Under Labor Code 2750.5
When a construction subcontractor is exempt from analysis under Dynamex, the Borello factors described above will be used to determine whether the worker is a subcontractor or an independent contractor. Labor Code 2750.5 will also come into play with Borello.
Licensed individuals will generally be presumed to be employees unless proven otherwise. When someone will be considered an independent contractor, the following factors must also be proven:
- (a) The individual has the right to control and discretion regarding how their contract is performed – the contract is for the result of work, not the means by which the work is done.
- (b) The individual is customarily engaged in an independently established business
- (c) The individual is a bona fide independent contractor – and their status isn’t an attempt to avoid employee status.
If that sounds a lot like the Dynamex/AB 5 test described above, they’re pretty similar. But, by considering these factors and the Borello factors, there’s more room to argue that a party performing construction work is an independent contractor rather than an employee.
California AB 5 and Dynamex shouldn’t affect the construction industry much
Whether it’s determined by the ABC test or the old Borello test, this new legislation shouldn’t be earth-shattering. In fact, as described above, there’s a blatant carve-out for those acting as subcontractors in the construction industry. But, even if the ABC test under AB 5 and Dynamex is used, construction businesses should have no problem passing those factors, by and large.
Think about it…using the ABC test:
(A) The person is free from the control and direction of the hiring entity…
Subs are generally performing work at their own direction. Sure, GCs and other customers may coordinate the work – but GC’s shouldn’t be in the habit of micro-managing subs.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
That’s the whole point of subbing out the work! Subcontractors have specialized into certain trades. But, in a situation where work is subbed out simply for the extra workforce, this line could admittedly blur a bit.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Again – this speaks to the nature of subcontracting. Construction trades have specialized, leading to subcontracting highly specialized work. As long as a subcontractor is performing work that traditionally falls into a certain trade, and as long as that’s the sub’s normal course of business, this should be easy to meet.
California courts and the construction industry
As-written, California AB 5 shouldn’t have a massive impact on the construction industry. But, it’s worth noting that it’s up to the courts to apply legislation to the construction industry when a lawsuit arises – and the courts aren’t always predictable.
We discussed that in a recent article: California Mechanics Lien Deadline | When Does the Clock Begin to Tick? In that case, it seemed like the court may have ignored some practical outcomes of their decision because it ignored some basic realities of the construction industry (namely, the interaction between contractors, subcontractors, and sub-subcontractors).
So, while AB 5 shouldn’t shock the senses of the construction industry, it will be very important to track how the new law will be treated by the courts.