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California Assembly Bill 5: What Entrepreneurs Need to Know

I have looked at California Assembly Bill 5 (AB5) as it applies to most of the small businesses I deal with and who are service providers.  If you are in direct sales, I have provided the language from AB5 that applies to you at the end of this blog.

My comments herein are to help you navigate the content.  I have added emphasis to language I deem particularly relevant.  I am not and cannot provide legal advice. 

There are lots of industries where the rules become very specific and you should read the document itself to see how it might apply to you.  

Please go here to get a copy of actual document:

One of the complaints I hear frequently from entrepreneurs is how many people want to hire them as an Independent Contractor and then want to determine how much they pay, the hours you work, and then proceed to micro manage their performance.  Not cool.  

California Assembly Bill 5 seeks to clarify the distinction between employees and Independent Contractors. For most of you as Independent Contractors to others there should be very little impact.  For someone wishing to hire you as an Independent Contractor there are no problems as long as they comply with all of the following conditions which I have copied from California Assembly Bill 5, to wit:

“…a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following 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."  

Assembly Bill No. 5, Chapter 296

This is not new, and I think it is clear.  However, the bill goes into a lot of good detail as to how various industries will be treated (and primarily these treatments seem to be directed to the application of rule “C” above). 

Basically, as I read it, if a matter goes to court and the ABC rules cannot be applied then they will use the decision found in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello) which I have not read. 

What does seem to apply to the small business owners who fall into the solopreneur class is found on pages 8 & 9:  

“(e)  Subdivision (a) and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions:

(1)  If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied:

(A)  The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B)  The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.

(C)  The contract with the business service provider is in writing.

(D)  If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.

(E)  The business service provider maintains a business location that is separate from the business or work location of the contracting business.

(F)  The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.

(G)  The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.

(H)  The business service provider advertises and holds itself out to the public as available to provide the same or similar services.

(I)  The business service provider provides its own tools, vehicles, and equipment to perform the services.

(J)  The business service provider can negotiate its own rates.

(K)  Consistent with the nature of the work, the business service provider can set its own hours and location of work.

(L)  The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

(2)  This subdivision does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a contracting business.

(3)  The determination of whether an individual working for a business service provider is an employee or independent contractor of the business service provider is governed by paragraph (1) of subdivision (a).

(4)  This subdivision does not alter or supersede any existing rights under Section 2810.3.”

Assembly Bill No. 5, Chapter 296

Again, there is really nothing new here as the majority of this content has always been in place as a “rule of thumb” but it was not written into law.  The bad behavior has been on both sides, i.e. employers who were trying to avoid having to pay employee taxes and Independent Contractors who were not wanting to have taxes withheld.  When the hiring parties started not paying taxes or other benefits AND controlling how much and how people were paid, controlling the hours and work performance and then wanting the C to pick up all of the expenses, there was a loud outcry when solopreneurs who found they had no benefits, rates being determined by someone else and they were carrying the burden of all of the taxes and expenses. 

As promised, if you are in direct sales, the following language from California Assembly Bill 5 that directly applies reads:    

“(5)  A direct sales salesperson as described in Section 650 of the Unemployment Insurance Code, so long as the conditions for exclusion from employment under that section are met.”    

The part of the California Unemployment Insurance Code Section 650 that is being referenced reads: 

“(a) …is engaged in the trade or business of primarily inperson demonstration and sales presentation of consumer products, including services or other intangibles, in the home or sales to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis, for resale by the buyer or any other person in the home or otherwise than from a retail or wholesale establishment.

(b) Substantially all of the remuneration (whether or not paid in cash) for the services performed by that individual is directly related to sales or other output (including the performance of services) rather than to the number of hours worked by that individual.

(c) The services performed by the individual are performed pursuant to a written contract between that individual and the person for whom the services are performed and the contract provides that the individual will not be treated as an employee with respect to those services for state tax purposes.”

California Code, Unemployment Insurance Code – UIC § 650

AGAIN, I am not, do not, and cannot provide legal advice. The content I have provided herein came straight from AB5 and Section 650 of the Unemployment Insurance Code which are available to all of you to read on your own.  I encourage you to do so as I believe it is important for entrepreneurs to educate themselves about all aspects of their businesses.  From marketing to operations to maintaining the financial health of your business NO ONE CARES MORE than you do about your success. 

Are you an independent contractor?  California Assembly Bill 5 is changing things for small business owners and independent contractors

Hope you found this not only useful but also empowering.  As an Independent Contractor, you get to determine how much you are paid for the services you perform.  If someone wants to tell you how much you will get paid they need to make you an employee, guarantee a certain number of hours per week (full time or part time), pay employer taxes, pay all of the related expenses for you to do your work and give you vacation, sick time and holiday pay. 

Did this help? If you were able to find the ways that this applies to you, leave a comment below or on Facebook. I would love to hear from you!

Lorna Whiteaker

Lorna Whiteaker is a San Luis Obispo business consultant and coach dedicated to helping business owners get the results they want. Lorna has over 30 years of experience working with small businesses, working as an administrator in the legal industry and as an independent business consultant helping hundreds of entrepreneurs. With clear and realistic expectations of just what a business owner must deal with in running their business, big or small, she has worked with firms making 7 figures and start-ups with little more than elbow grease and a dream.