- What is AB 5?
AB 5 is a bill the Governor signed into law in September 2019 addressing employment status when a hiring entity claims that the person it hired is an independent contractor. AB 5 requires the application of the “ABC test” to determine if workers in California are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission (IWC) wage orders.
- What is the ABC test?
It is the test that applies in most situations to determine whether a worker may be properly classified as an independent contractor. It requires that:
A. The person is free from the control and direction of Oxy 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 Oxy’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.
- What questions should I ask to know if the individual is free from control and direction?
A. Will the person decide how work is to be done without Oxy’s direction or instruction?
B. Is the person responsible for their own training?
C. Does the person set their own hours of work?
D. Does the person decide the order or sequence of services?
E. Will the person pay for their own business and travel expenses?
F. Does the person furnish their own tools and materials?
- What questions should I ask to know if the person performs services that are outside the usual course of Oxy’s business?
A. Does the person provide a unique skill set not currently provided by Oxy employees?
B. Is the person engaged for a specific project for a specific time?
C. Does the person provide a service similar to others who are employees?
D. Has the person ever been employed by Oxy?
E. Will the person supervise any Oxy employees?
- What questions should I ask to know if the person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed?
A. Was the person’s independent business in existence prior to hiring?
B. Is the person’s business incorporated?
C. Does the person hire their own employees?
D. Does the person perform the services off-site?
E. Does the person have other customers?
F. Does the person advertise their services?
G. Does the person have a professional license or professional liability insurance?
H. Does the person have their own tools and materials required to perform the service?
- Do AB 5 and Labor Code section 2775 et seq. require use of the ABC test to determine if a person is an independent contractor for all occupations?
No. There are situations where the ABC test will not apply. There are express exceptions.
Please see Borella / "Economic Realities" Test section of the Employee / Independent Contractor Worksheet
- When did AB 5 become effective?
The law became effective January 1, 2020.
- What if we have a signed agreement stating the person is an independent contractor already?
A signed agreement is not determinative of a worker’s status. If a person is incorrectly classified as an independent contractor when they should be treated as an employee, Oxy is at significant risk of failing to comply with its obligations as an employer, including the following:
- Withholding and remitting appropriate employment taxes
- Filing appropriate returns and providing required benefits
- Following employment laws and regulations, consistent with guidelines from the EDD and Department of Labor
- What if we hire the person only once?
The analysis set forth in Oxy’s Independent Contractor Policy must still be performed, with the central question being the degree of control Oxy exercises over the person’s work. But the limited nature of an engagement may be relevant to the second factor of the ABC test.
- What if the person refuses to be hired as an employee?
If a person refuses to be hired as an employee, when they may not be properly classified as an independent contractor, Oxy will not hire that person to perform the work.
- What difference does it make if a person is an independent contractor rather than an employee?
Independent contractors have autonomy that employees generally do not to determine their hours and the manner of performing their work, free from an employer’s supervision. But they are also not subject to certain laws and regulations that protect employees, including those related to wage and hour issues (e.g., minimum wage, overtime, meal and rest breaks, etc.), unemployment, workers’ compensation, workplace safety, and discrimination, harassment, and retaliation (unless they have been misclassified). Independent contractors come with their own training, provide their own tools, and cover their own health care and other expenses. They are also subject to different tax obligations. There are benefits and disadvantages to being an independent contractor, and AB 5 exists to ensure this balance is properly maintained.
- Are there penalties for misclassifying employees as independent contractors?
Yes. In addition to penalties that may be assessed for wage violations, there are civil penalties for willful misclassification between $5,000 and $25,000 per violation. Willful misclassification is defined as voluntarily and knowingly misclassifying an employee as an independent contractor.