A new series of tests are being used to further define the legal status of independent contractors (IC) in California, as well as those engaged in the so-called “gig” economy (such as Uber, Lyft, Postmates, DoorDash, etc.). These criteria are included in Assembly Bill 5 (AB 5) signed by Governor Newsom on September 18 and set to take effect January 1, 2020.
This law presumes that a worker performing services for hire is an employee for purposes of claims for wages and benefits under wage orders from the state’s Industrial Welfare Commission (IWC). However, several dozen occupations have been exempted, but two key agriculture-related categories (truckers and tree cutters) are not exempt at this time.
Specifically, AB 5 was enacted to amend Labor Code Sections 606.5 and 621 of the Unemployment Insurance Code requiring employers to make contributions in connection with unemployment and disability insurance from wages they pay to their employees.
While most of what farmers and ranchers do is not subject to this legislation, questions concerning the use of independent trucking contractors and those engaged in felling and carting trees, for examples, have the agriculture community buzzing about the potential impact of this law on their operations if independent contractors are reclassified as employees.
According to a California Farm Bureau Federation (CFBF) fact sheet, AB 5 impacts farmers and ranchers who contract with various service providers, including farm labor contractors, irrigation contractors, agronomists, pest control advisors, workplace safety advisors, human/labor relations consultants, and truckers.
Kevin Barr, co-owner of Redwood Empire Vineyard Management (REVM), said for him AB 5 is “unbelievable.” He said, “We’re coming off two and a half months of intense harvest operations. I haven’t had a chance to think about AB 5 and need more information. We are already engaged in complying with the new hourly wage law and overtime changes while completing our first housing project for H2A workers.”
As a licensed labor contractor for 36 years, Barr said REVM has a need for more workers from time to time. “We have our own trucks but have to supplement our teams with outside workers during a crunch. Small farm owners definitely rely on independent contractors, along with the construction side of our business, for building roads, bringing in straw for erosion control, delivering pesticides and other materials. Many vineyards hire firms such as ours to handle staffing requirements for them. This is huge responsibility and comes with liabilities for us.”
The AB 5 changes are part of a labor code expansion and the reach of a test that began with the Dynamex Operations West, Inc. courier decision by the California Supreme Court in 2018 that further defines the relationship between a worker and those that hire workers under provisions of the IWC.
Existing law mandates a three-part “ABC” test (that replaces the Borello “economic realities” test that remains in place for professionals granted AB 5 exemptions) to determine if a worker providing labor or services for pay will be classified as an employee or an independent contractor.
Under the ABC test, a worker is an IC only if:
- He or she is free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact, and the hiring entity can only accept or reject results the worker achieves, not control how results are achieved,
- The person performs work that is outside the usual course of the hiring entity’s business, meaning that the IC should not be doing the same work as the hiring firm’s employees ordinarily do, and
- The person is customarily engaged in an independently established trade, occupation or business that exists independently apart from the service relationship with the hiring firm of the same nature that is involved in the work performed by the hiring firm.
A California Farm Bureau Federation (CFBF) fact sheet says AB 5 throws the status of many service providers into doubt, not just due to the rigidity of the ABC test, but because of structural problems with provisions in the legislation. It would seem that a service provider is not an individual but an entity – such as a corporation or LLC — and could not be subject to the ABC test because only an individual human can be an employee. AB 5 put into the Labor Code a B2B exemption that ignores this legal principle. This is not the only legal conclusion in SB 5 that goes contrary to existing law.
It is difficult for most workers to qualify as ICs under all three of the ABC requirements because they must be free from the control, and work outside the hiring firm’s usual business, and also have an independent business. California is now looking at eight to 12 other factors to determine if an employer has the right to control a worker.
Some additional criteria include whether a worker can be fired at any time; is paid by the hour or by the job; provides his or her own tools, supplies and workplace; is performing skilled or unskilled work; is engaged in a distinct occupation or business; receives instructions from the hiring firm; works for the hiring firm for a brief or long period, and also whether the worker believed he or she and the hiring firm were creating an employer-employee relationship.
The picture of what to do in response to this new law is further clouded by the reality that no one factor mentioned above determines IC or employee status, and not every factor must be satisfied for a worker to be an IC. The primary ABC disqualifier for an IC is whether the worker involved is under the hiring firm’s control.
“AB 5 is confusing,” said Andy Poncia, owner of Poncia Fertilizer, Inc., a DOT registered, licensed, bonded and diversified freight shipping and trucking company hauling grain, feed, hay, dry bulk, and agriculture farm supplies as well as fertilizer. His busiest time of year is between August and October when fertilizer is spread over dairy farm pastures.
“We have our own trucks, but sometimes need more during peak times and for spot work. I think the construction industry will really be impacted by this law, but I need to know more about it. What we do varies from day to day. We may need 15 trucks one day and up to six times that number the next.”
In the Dynamex decision, the court referenced harm caused by misclassified workers who lost significant workplace protections and basic rights under the law including minimum wage, paid sick leave and paid family leave.
The California legislature has said misclassification is unfair to employers who must compete with firms that misclassify workers and leads to the loss of state revenue from companies that misclassify workers to avoid the payment of payroll taxes, workers’ compensation premiums, Social Security, unemployment and disability insurance.
For James Hall, founder and winemaker of Patz & Hall Winery in Sonoma, independent contractors are hired through an express company to transport glassware, barrels, grapes, etc., all year round. Their CPA is also an IC.
“We don’t hire IC truckers and we’re not going to hire independent truckers as employees. Our own employees perform these services.”
To address confusion and misunderstanding about AB 5, agriculture associations have plans to provide background information, conduct regional educational meetings and host online sessions for their members in the weeks and months ahead.
“AB 5 was signed into law, but there will no doubt be additional legislation on this issue in 2020 involving the use of independent trucking contractors,” said Michael Miller, Director of Government Relations for the California Association of Winegrape Growers (CAWG). “ABC also stands in conflict with the state’s unemployment insurance code.”
Miller said CAWG is developing a webinar addressing AB 5 to be ready for release in January. He pointed out that te pHHhere will be further discussions concerning reviews of business to business relationships on a case-by-case basis. For example, Uber and Lyft are attempting to change the perception of their business model saying they are not a transportation company, but rather an information, documentation, and logistics firm.
Agri-Pulse estimates AB 5 will affect about two million workers across various industries in California. Among the most impacted will be an estimated 70,000 small trucking companies, of which a large proportion are independent truckers who seasonally haul produce and livestock.
Assembly Member Lorena Gonzalez, author of AB 5, is aware of the need for additional exemptions and has been negotiating exemptions for specific industries (such as licensed beauty care workers and emergency room doctors) but other industries are still seeking their own exemptions.
“We hope to have another run at making modifications that could include finding ways to seek an exemption for the agriculture industry in connection with their relationships with truckers who are independent contractors,” said Bryan Little, director of labor affairs with CFBF and CEO of the Farm Employers Labor Service (FELS).
He said without going into details or revealing strategies in the making, that efforts are definitely underway to seek clarity on these issues and to fix AB 5 for truckers and tree fellers that currently have no exemptions.
“We’re talking with a lot of people about was is feasible to work out. It doesn’t make sense to reclassify an independent contractor as an employee for half a day just to cut down a tree, or for a water hauling IC trucker to be reclassified as an employee for just a few days a year. We need rules with general applicability that apply to farmers in such cases.”
He quipped that it remains to be seen if attorneys can make money looking for deep pockets to sue in connection with AB 5. It has been reported that Uber and Lyft have put together a $90 million fund to put a measure on the ballot to counter this legislation, and trucking firms have also filed lawsuits.
“Without an exemption, small trucking owners/operators could be out of business leaving farmers and ranchers to cope with large trucking firms. Some big companies have one-third more trailers than tractors so they can hire substitute independent drivers as temporary employees. But for independent owner/operator truck drivers, AB 5 will be a problem.”
Little observed that “clean-up” changes to this law could be made in December during an abbreviated legislative session before the holiday recess, but more likely nothing will be done until Q1 2020 when the state legislature reconvenes.
“AB 5 is a mess. Nothing has gelled as yet, and it’s still too early to tell what the outcome will be. People are feeling their way along in an attempt to get something done. Meanwhile, new contracts may have to be written to meet provisions of AB 5, and independent contractors may have to become employees, or sell their trucks and take jobs with major trucking companies to comply with this law,” he added. “The good news is that most things farmers do will not be impacted by AB 5.”