What Does CA AB5 Mean for the Construction Industry?

The construction industry has been paying close attention to recent decisions about subcontractors vs. employees in CA. The CA Supreme Court embraced a standard presuming that all workers are employees rather than contractors in the landmark Dynamex case -- a decision that left many industries in uncertainty.

In an industry where subcontracting work to independent contractors is the norm, construction business owners worried: what's this mean for me?

What is CA AB5?

Assembly Bill No. 5 (AB5) calls for an amendment to CA's Labor Code and "creates a presumption that a worker who performs services for a hirer is an employee for purposes of claims for wages and benefits".

AB5 is aimed at the misclassification of employees in the gig economy, like Uber, Lyft, and Doordash drivers. However, the ramifications of this bill could affect the construction industry, as well.

AB5 imposes a three-pronged test (known as the ABC test) identifying who's free to be a contract worker and who has to be a hired employee.

The AB5 "ABC" Test

A person providing labor or services will be presumed to be an employee, rather than an independent contractor, unless the following 3 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.

AB5 was signed into law in September of 2019 and becomes effective state law in CA on January 1, 2020.

AB5 May Exempt Construction Subcontractors

AB5 amends 2750.3 of the California Labor Code, but leaves a crucial exception for "an individual performing work pursuant to a subcontract in the construction industry" if they meet all of the following criteria:

1. The subcontract is in writing.
2. The subcontractor is licensed by the Contractors State License Board and the work is within the scope of that license.
3. If the subcontractor is domiciled in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor has the required business license or business tax registration.
4. The subcontractor maintains a business location that is separate from the business or work location of the contractor.
5. The subcontractor has the authority to hire and to fire other persons to provide or to assist in providing the services.
6. The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided.
7. The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.

For the most part, specialty contractors and separate trades would still be considered an independent contractor, even under the AB5 ABC test.

Contractors and subcontractors may have some cause for concern when subbing out work they might typically undertake, themselves. However, most construction subcontractors would presumably be considered an independent contractor under this test.

AB5 Exemptions Leave Borello Test For Guidelines

California has long used the Borello test to determine if workers should be classified as employees or independent contractors. If a worker is exempt from AB5, the Borello guidelines will still apply when considering worker classification status.

Borello provides a laundry list of factors all taken together and weighed against one another. Under Borello, no single factor is enough to prove or disprove whether a person should be considered a contractor or an employee.

Borello factors:

1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal or alleged employer;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee's investment in the equipment or materials required by his or her task or his or her employment of helpers;
5. Whether the service rendered requires a special skill;
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
7. The alleged employee's opportunity for profit or loss depending on his or her managerial skill;
8. The length of time for which the services are to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

Both Dynamex and Borello operate under the assumption that a worker is an employee rather than an independent contractor.

Do Your Subs Pass the Test?

Licensed individuals will generally be presumed to be employees unless proven otherwise. When someone is considered an independent contractor, the following factors must be proven:

• (a) The individual has the right to control and discretion regarding how their contract is performed -- the contract is for the result of work, not the means by which the work is done.
• (b) The individual is customarily engaged in an independently established business.
• (c) The individual is a bona fide independent contractor -- and their status isn't an attempt to avoid employee status.

By considering these factors and the Borello factors, there's more room to argue that a party performing construction work is an independent contractor rather than an employee.

Construction Contractors Likely Unaffected by AB5

AB5 specifically leaves room for construction subcontractors to be exempt from the new rules for independent contractors.

This means you and your construction business should have no problem passing the ABC test and relying on the existing guidelines to determine if a worker is an employee or subcontractor.

Just remember to let your subs perform their work at their own direction (don't micro-manage!); rely on subs only when you need work done that's outside of your usual work (not to increase your labor force); and be sure you're using subs who specialize in the work you're asking them to do.

As it's written, California AB5 shouldn't have a massive impact on the construction industry. But, it's up to the courts to determine how to apply the law when lawsuits arise. If you have questions about your workers or the impact of AB5 on your construction business, be sure to talk to your attorney for more clarification.