On September 18, 2019, California Governor Gavin Newsom signed into law Assembly Bill 5 (“AB 5”), which establishes a three-pronged test that a business must satisfy to maintain that a worker is an independent contractor for employment purposes in the state. This bill becomes effective January 1, 2020Dynamex Operations West, Inc. v. Superior Court of Los AngelesDynamex
and codifies a 2018 Supreme Court of California decision in
(2018) 4 Cal.5th 903 (
), which redefined the standard for determining whether a worker is an independent contractor or an employee.
case held that there is a general presumption that most workers are indeed employees and should be classified as such, with the burden of proof on employers to classify individuals as independent contractors by using what is now referred to as the “three-pronged ABC test.” The ABC test is much narrower than that of the multi-factor standard previously used in California (i.e., the
test), which made it far easier to classify workers as independent contractors.
The ABC test is a much stricter standard of proof. Under the ABC test, for a worker to be classified as an independent contractor, an employer must first prove each of the following:
- The worker is free from the control and direction of the hiring company “in connection with the performance of the work, from both a ‘practical perspective’ as well as under the contractual agreement between the parties”;
- The worker performs work that is “outside the usual course of the hiring company’s business”; and,
- 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.
AB 5 implications to CPA firms who hire independent contractors
As it stands now, approximately 50 professions or types of businesses are exempt from the bill. Notable exemptions under AB 5 that are important from a CPA firm’s perspective include:
- An individual who holds an active CPA license from the State of California.
- An enrolled agent who is licensed by the United States Department of the Treasury to practice before the Internal Revenue Service pursuant to Part 10 of Subtitle A of Title 31 of the Code of Federal Regulations.
- Certain business-to-business contracts that meet specific requirements.
If your firm has independent contractors that meet the criteria under one of the exemptions noted under AB 5, those individuals are exempt from the ABC test. However, it is important to note that an exemption from AB 5 does not mean that workers can automatically be classified as independent contractors. For the vast majority of the exemptions, the bill provides that the determination of employee or independent contractor status shall be governed by the BorelloBorello
test. Consequently, structuring and documenting the independent contractor arrangement to comply with the applicable test, which will usually be the multi-factor
test, is still crucial for exempt individuals and business-to-business contracts. CAMICO recommends that CPA firms consult with legal counsel experienced in employment practice matters to review the firm’s independent contractor relationships to determine the appropriateness of these classifications.
Risk management guidance for firm clients
Since the impact of this new law may be significant to some of your business clients and pose some risks to your firm, CAMICO is encouraging you to make your business clients aware of the new law as soon as possible and to clarify the steps they should take to determine the appropriateness of their worker classifications. This awareness campaign will help minimize your risk of a future allegation from your client alleging that “my trusted advisor failed to warn meClient Notification Letter—AB 5CAMICO Members-Only Site(www.camico.com)AlertsKnowledge Tree under Alert Documents, 2020, AB 5 folder
.” To help you in your client awareness efforts, CAMICO has developed a sample
which is available to download via a link found in the IMPACT 116 email. It is also available on the
portlet on the right of the home page or from the
Depending on the scope of your services, some of your clients may presume that you will be responsible for, as well as assist them with, determining appropriate worker classification status as part of the services you are performing. Engagement letters are an important risk management tool to protect your firm by clarifying to your clients (as well as to juries) the scope and limits of your work. Although engagement letters will not make you immune from lawsuits, they are a strong first line of defense were a client to make a claim against you, so it is important to use engagement letters for all of your clients.
For example, if your firm performs payroll services for some clients, or prepares the payroll tax returns, or any other services that may pose risks with respect to worker classification issues, consider adding specific language in your engagement letters that specifies what you will NOT
be doing with respect to independent contractors. Below is some suggested engagement letter language we recommend you consider inserting in your agreements.
We will not be responsible for advising you with respect to independent contractor status as part of our services. If you have any questions regarding the classification of employees versus independent contractors, we strongly encourage you to consult with legal counsel experienced in employment practice matters to assist you as appropriate.
Do not stepDynamex
into the role of “advisor” (formally or informally) with your clients as it relates to worker classification questions. There is a lot of uncertainty with AB 5. The new law is expected to face legal challenges and many unanswered questions remain, including whether
applies retroactively. CAMICO strongly encourages you to advise your clients to consult with legal counsel experienced in employment practice matters to review their independent contractor relationships, to determine the appropriateness of these classifications, and to assist them, if necessary, if they are subject to AB 5 to determine if reclassifications may be required to mitigate potential exposures.
Please note that the risk management tools identified above are not meant to be all-inclusive. Your firm might choose to incorporate information on this issue in your client newsletters or by other methods. Adequately communicating (and documenting having done so!) this issue to potentially impacted clients is important.
If you have any questions, please contact CAMICO at 1.800.652.1772 or email the Loss Prevention Department at email@example.com