News & Articles

Presumptions of Employment and the ABC Test After Enactment of California Bill AB-5 Raise Concerns

11 / 24 / 2019

TAX FORM:  Form SS-8, Form 1099-MISC, Form 1099-NEC

TAX FORM TROUBLE:  The impact of California Bill AB-5, signed into law on September 18, 2019 continues to be felt across the country, even though Uber and Lyft believe they meet the stricter tests, looking to curtail misclassification of workers as independent contractors and certain states have enacted laws aimed at protecting certain on-demand economy workers as independent contractors.  Implementation of any presumption of employment runs counter to the remedial purposes of Section 530 of the Revenue Act of 1978


September 18, 2019--California AB 5 Enacted into Law (effective January 1, 2020)

Effective January 1, 2020, a new, stricter law governing classification of workers will go into effect in California. That law (known as California AB 5 (Assembly Bill 5) amends California law to make the ABC factors in California "law."

The law inserts Section 2750.3 into the Labor Code of California.  The law follows up on the Dynamex decision from the California Supreme Court in 2018, creating the 3 factor ABC test to replace the 11-factor Borello test.

Under this law:

The burden of proof on the employers to show that an independent contractor is properly classified, under ALL 3 of the ABC factors:

(1)  the worker is free from the control and direction of the hiring party in connection with the peformance of work, both under the contract and in fact

(2) the worker performs work that is outside the usual course of the hiring entity's business

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

Certain professions are made exempt under the law (doctors, dentists, lawyers, psychologists, stockbrokers, accountants, insurance agents, engineers, and real estate agents.  Newspaper delivery workers get an extra year to comply with the new law.

The California Trucking Association has filed sued in Federal court in California challenging the law and the prior Dynamex ruling, claiming that many of its drivers had opted into independent contractor status, and this will prevent them from setting their own schedules and receiving certain benefits from being independent contractors.

Of course, in some states, like Florida, Kentucky, Indiana, Iowa, and Tennessee, efforts have been made to pass laws protecting "marketplace contractors" or specific on-demand economy workers as independent contractors.

The 9th Circuit recently reinstated its Jan-Pro decision in response to the enactment of California AB-5, which impacts the efforts of authorities to reclassify franchisee workers as employees, and has asked the California Supreme Court to determine whether or not the law is to be construed and applied retroactively, potentially impacting over 70,000 franchisor-franchisee relationships in the state.  

If implementation of any laws presuppose a presumption of employment, this may run counter to Section 530 and its safe harbor protections at the federal level, for those who meet its criteria.  Practitioners and consumers will note that no presumption of employment can exist when Section 530 applies as it is a remedial statute aimed at curbing overly aggressive reclassification efforts by the IRS, when its criteria are met.

If you have any questions about the use of Section 530 to your particular situation or as to worker classification standards, inclusive of 20-factor, or economic reality tests, or joint employer, please do not hesitate to contact T. Scott Tufts at 407-647-7887.