Chinese general and philosopher Sun Tzu said, “If you know the enemy and know yourself, you need not fear the result of a hundred battles.”
AB5 may not be an “enemy” per se, but it is an unclear piece of legislation that has many people up in arms.
As a new law, we have no way of knowing how AB5 will be interpreted or what future exceptions will be added.
The more we can understand the law, the better off we’ll be. As you recall, under the AB5 law, independent contractors, or ICs, must meet all three strict ABC criteria to truly qualify as independent contractors rather than employees. Read more about those criteria in the first article of this series “Get a bigger boat: AB5 is now law.”
In this article we’ll take a closer look at the exceptions or carve-outs to the law.
First, a few qualifiers.
Out of the thousands of jobs in the cradle of innovation that is the very large state of California, only a few dozen industries are carved out of the AB5 legislation, and the jobs that are carved out specifically can seem arbitrary. For example, fine artists are carved out, but musicians aren’t. Psychologists get an exception, but psychiatrists are not specifically named as being outside of AB5’s ABC Test.
Plus, we must keep in mind that these carved out professions are not truly exempt from all IC requirements. They are simply exempt from the ABC Test, which means that contractors must still be qualified under the previous multi-factor Borello Test.
The Carve Outs
One way to group the exceptions is to place them in three different buckets: Recognized or Specifically Named Professions, Professional Services and Business-to-Business exceptions.
AB5 specifically exempts from the ABC Test the following professions:
Physicians and surgeons, dentists, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, accountants, broker-dealers, investment advisers, direct salespersons, private investigators and commercial fisherman.
As we’ve mentioned, the exclusions beg “why this, but not that?” questions. Companies trying to prove their classifications may try to draw parallels between their ICs and a class of exempted ICs in order to defend against claims of misclassification.
Professional Services Exemptions
To be exempt under this bucket, the professional service providers named below must meet six specific service requirements:
- Have a business location
- Have a business license (beginning in June 2020)
- Negotiate their rate
- Work hours they designate
- Have other clients or makes themselves available to other clients
- Exercises independent judgment in performance of services
Professional Service Providers include: marketing contractors, human resources administrators, travel agents, graphic designers, grant writers, fine artists, enrolled tax agents, payment processing agents, still photographers or photojournalists, freelance writers, publication editors and newspaper cartoonists.
Note that still photographers, photo-journalists writers and cartoonists are exempt if they do not submit projects more than 35 times per year for the same client.
Also note that the photographers and writers named above do not appear to include writers, directors, etc., for the entertainment industry. In fact, the photographer exception specifically states that it does not apply to the motion picture industry. The entertainment sector may lobby extra hard for exceptions next year.
Also included are licensed real estate salespersons, repossession agents, licensed barbers, estheticians, electrologists, manicurists, and cosmetologists only if they meet the above-listed 6 specific service requirements.
Business-to-business contractors are carved out if they meet the following specific criteria:
- Contractor is free from the control and direction of the contracting entity, both under the contract and in fact.
- Contractor is providing services directly to the contracting business rather than to customers of the contracting business.
- Contractor has a written contract.
- Contractor has a business license or business tax registration, if required.
- Contractor maintains a business location that is separate from the business or work location of the contracting business.
- Contractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.
- Contractor actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
- Contractor advertises and holds itself out to the public as available to provide the same or similar services.
- Contractor uses its own tools, vehicles, and equipment to perform the services.
- Contractor can negotiate its own rates.
- Contractor can set its own hours and location of work.
- Contractor is not performing the type of work for which a license from the Contractor’s State License Board is required.
Selected construction subcontractors and motor club service providers are also exempt from the ABC Test.
This exception is quite lengthy and chock full of factors to satisfy. Businesses would be wise to see how well they can compose or adjust their IC engagements to fit within this exception, if possible.
Referral Agencies are also carved out. Referral agencies connecting clients with service providers that meet all of 10 specific requirements in these industries are exempt from the ABC Test: graphic design, photography, tutoring, event planning, minor home repair, moving home cleaning, errand running, furniture assembly, animal services such as dog walking and dog grooming, web design, picture hanging, pool cleaning, and yard cleanup.
Read more about how app-based businesses are being affected by this part of the law.
If you’re scratching your head reading this list, or frustrated by the fine print of specific requirements for each category, you’re not alone.
The professions included and excluded can seem downright nonsensical at times. For example, why are barbers included in the service category but not massage therapists? The claim can be made (and likely will be) that there is no reasonable basis for the distinctions.
AB5 will most assuredly be heavily litigated because there is ample room to argue that an exempt service is much like several services that are not exempt.
As frustrating and confusing as AB5 might be, we can look to other states such as Massachusetts, that have been using the ABC test to qualify contractors for more than 15 years. It’s reassuring that independent contractors have not fled that state, nor become obsolete.
At TalentWave, we are well-versed in the intricacies of AB5. If you need help understanding what actions to take, our on-staff legal specialists are here to assist you.
This article is the second in a four-part series on AB5 introducing Talentwave’s November 6 webinar “AB5: Truths, myths and mysteries. How smart companies can succeed under the new law.”