Perspectives on AB 5 and Its Impact on Independent Leaders

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By Robert Curtis and Matt Spooner

What is AB 5?

California Assembly Bill 5, or AB 5, is a new law taking effect on January 1, 2020, that amends certain provisions of the California Labor Code. AB 5 creates a stricter standard for determining when workers are considered independent contractors rather than employees.

This law requires a three-part test, commonly known as the “ABC test”, to establish that a worker can be classified as an independent contractor. Workers are assumed to be employees unless they meet all three conditions of the test. The business, not the worker, is responsible for proving that an individual is properly classified as an independent contractor.

The ABC’s of the ABC Test

Under the ABC test, businesses bear the burden of proving that independent workers in California satisfy all three of the following factors:

(A) The worker is free from 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; and

(B) The worker performs work that is outside the course of the hiring entity’s business; and

(C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

A business’s failure to prove any one part of the ABC test will result in the worker being classified as an employee. Businesses won’t be able to avoid this test by way of a contract through which the parties agree the worker is an independent contractor.

AB 5 Perspectives for Independent Leaders

There have been a variety of reactions to this controversial piece of legislation. The bill was arguably focused on correcting the misclassification of a certain set of contract workers. However, we believe that as written, it may inadvertently affect a much broader spectrum of independent workers in unintended industries.

As GigX is a platform that helps companies connect with and hire independent leaders, we are offering our perspective in the ways we believe AB 5 may impact this subset of workers.

Before we do so, let’s define this population. By “independent leaders,” we mean executives who are hired by companies on a fractional basis. These engagements might be part-time for a lengthy term or full-time for a short period, and range in focus from executing a single project to developing an entire line of business.

These leaders are brought into the highest level of organizations to help companies think strategically, become more efficient, and expand their influence.

At GigX, we believe that AB 5 won’t limit opportunities for the vast majority of independent leaders based in California. Here’s why:

(A) The worker is free from 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.

The GigX Perspective: For companies to meet this condition, they need to document the worker’s independence and subsequently provide it. The nature of independent work is, not surprisingly, independent by design. It allows these leaders to work toward mutually-agreed upon goals as they deem appropriate.

As long as organizations clearly define relationships with independent leaders via formal and lawful contracts and these organizations allow these independent leaders to manage their time and efforts toward agreed-upon goals, we believe this portion of the test can be satisfied.

(B) The worker performs work that is outside the course of the hiring entity’s business.

The GigX Perspective: When it comes to their utilization, certain independent leaders are not hired by companies to perform the core work of the business. They are more frequently hired by organizations who need executive-level experience and leadership to define strategies, create operational efficiencies, or to chart a path for growth.

Let’s use the analogy of a pizza company. Due to AB 5, the pizza company wouldn’t be able to hire an independent contractor to come in and make pizzas. Making pizzas is the primary function of the pizza company, so anyone making the pizzas for that company would need to be an employee of the company.

However, an independent leader such as a fractional CFO who is engaged to create a new accounting system for the pizza company would not be performing work that is part of the company’s core business function. Therefore, the pizza company wouldn’t be violating AB 5 by working with an independent leader in this manner.

(C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The GigX Perspective: The wording “customarily engaged” could imply that an individual must have already worked as an independent leader in order to continue doing so. However, a more critical view of this part of the test indicates that a worker must have taken steps to create an independent business by their own choice. From our perspective, this bodes well for GigX members.

Why? Becoming a member of GigX and publishing a profile within our directory is in alignment with establishing and engaging in an independent leadership practice.

Exemptions

In some cases, the ABC test does not apply. Instead, criteria commonly called the Borello test is used. This test is an outcome of the case S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).

Some specific occupations, including individuals licensed in California as lawyers, architects, engineers, private investigators or accountants use the Borello test, provided they meet certain defined criteria.

The Borello test also applies to certain bona fide business-to-business contracting relationships between a business and a service provider where, among other things:

  • The service provider has a separate business location.

  • The service provider actually contracts with other businesses to provide the same services.

  • The service provider advertises and holds itself out to the public to provide the same services.

  • The service provider provides its own tools, vehicles and equipment.

  • The service provider can negotiate its own rates.

Independent leaders who have set up their service practice as a legal business entity and operate in the manner described by the bona fide business-to-business qualifiers would be considered independent contractors.

While there’s no doubt that AB 5 will continue to raise important questions and debates regarding how companies engage with their workers, our belief is that organizations will continue to leverage independent leaders in California. These independent leaders will likely pass the ABC test and may naturally qualify for exemptions under the Borello test.

It is also unclear at this time whether or not additional revisions will be made to AB 5 as a result of what we believe to be the inadvertent creation of such broadly sweeping legislation. In addition, since AB 5 will likely be appealed, the effective date of the new law may change. We will continue to monitor this legislation.

About the Authors

Robert Curtis is an executive with 12 startups under his belt. He has had numerous successful exits during his 30+ years as a senior executive. Robert is on the GigX Advisory Council and had his hand in developing the company’s business plan and financial projections. GigX, a startup based in Irvine, CA, is quickly becoming the number one global directory for independent leaders.

Matt Spooner is the Fractional Chief Business Development Officer for GigX, where he also serves as a member of the company’s Advisory Council. Matt has nearly two decades of experience within the arenas of Marketing, Sales, Business Development, and Account Management. He has built and led high-performing teams within both the for-profit and nonprofit sectors.  His cross-industry, cross-function experience allows him to approach opportunities and issues from a unique and valuable standpoint.

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