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The California Legislature, in its last week of the 2019 legislative session in September, arguably the most controversial bill of the session, AB 5, passed the State Senate on a 29-11 vote after over two hours of debate. The State Assembly concurred in Senate amendments on a 58-15 vote and sent the bill to the Governor for signature. 

Gov. Gavin Newsom signed legislation Wednesday morning, 9/18, enshrining a landmark California court ruling to declare more workers employees, rather than independent contractors, launching the next phase of heated negotiations with the tech industry. This issue is far from over.

Upon its passage in the Legislature, gig economy icon Uber publicly announced it would not reclassify drivers as the bill is intended to require. Uber also joined Lyft and DoorDash and have banked $90 million to fund either a referendum on AB 5, which would put the bill on hold until the next general election, or an initiative to address this topic in a way that would provide them some relief. Other organizations have threatened a lawsuit in equal protection grounds.

AB 5 will be effective January 1, 2020 but not applicable to workers’ compensation insurance until July 1, 2020. Until then, the Dynamex decision is the law in California. Under that decision, there is a presumption that when a hiring entity of business employs a person, that person is an employee unless the hiring entity can prove all the three elements of the ABC Test. 

ABC Test – 3 Elements:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under contract for the performance and execution of the work and in fact 
  2. The worker performs work outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

So how does this new law affect the swimming pool and spa industry?

The bill expands the Dynamex decision beyond wage orders to unemployment insurance and workers’ compensation beginning July 1, 2020. The ABC Test now applies to all employment situations in California.

AB 5 enacts several specific exemptions from the Dynamex decision. Those industries or professions that are exempted from the provisions of AB 5 revert to the Borello 11-point test as to whether the person hired is an employee or an independent contractor.

There are specific exemptions that could apply to pool builders and service/maintenance companies.

Pool Builders

AB 5 contains an exemption for the construction industry. Under the construction industry exemption, the holding in Dynamex does not apply to the relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry, and instead the determination of whether the individual is an employee of the contractor shall be governed by Section 2750.5 of the Labor Code and by Borello, if the contractor demonstrates that all the following criteria required by Section 2750.5 are satisfied: 

  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 (maintains their primary business location) 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.

Pool Service

This exemption from the Dynamex decision could be used by builders who have a service business, and who utilize independent contractors where the service person or subcontractor holds a D-35 Pool and Spa Maintenance Contractor license from the California Contractors State License Board (see Item 2 above). This exemption anticipates the pool builder is licensed as a contractor or pool builder, and the D-35 independent contractor meets all the provisions 1-7 above. 

This exemption could also apply to service companies that use independent contractors even if both the service company and the independent contractor have the same license. The argument is that AB 5 removed construction industry licensees from the Dynamex decision so being in the same business under the B portion of the ABC Test does not apply, so long as the parties meet the provisions 1-7 of Section 2750.5 above.

AB 5 contains a new exempt category, “referral agency,” from the Dynamex decision, defined as the relationship between a referral agency and a service provider

“Referral agency” is a business that connects service providers with clients that provide graphic design, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, web design, picture hanging, pool cleaning, and yard cleanup.  

There is an argument that this new provision could be used for service companies that use independent contractors. 

This part of the bill requires the service provider to be a business entity, not an individual, formed as a sole proprietor, partnership, limited liability company, limited liability partnership, or corporation (“service provider”) that provides services to clients through a referral agency. Under the bill, the determination of whether the service provider is an employee of the referral agency shall be governed by Borello, if the referral agency demonstrates that all the following criteria are satisfied:

  1. The service provider is free from the control and direction of the referral agency in connection with the performance of the work for the client, both as a matter of contract and in fact,
  2. The service provider is providing services directly to the contracting business rather than to customers of the contracting business.
  3. The contract with the business service provider is in writing. 
  4. If the work for the client is performed in a jurisdiction that requires the service provider to have a business license or business tax registration, the service provider has the required business license or business tax registration.
  5. The service provider delivers services to the client under the service provider’s name and location, rather than under the name and location of the referral agency.
  6. The service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed for the client.
  7. The service provider maintains a clientele without any restrictions from the referral agency and is free to seek work elsewhere, including through a competing agency.
  8. The service provider sets its own rates for services performed, without deduction by the referral agency.
  9. The service provider provides its own tools and supplies to perform the services.
  10. The service provider sets its own hours and terms of work and is free to accept or reject clients and contracts. The service provider is not penalized in any form for rejecting clients or contracts. 
  11. If the work for the client requires the service provider to hold a state contractor’s license pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code, the service provider has the required contractor’s license.

These criteria do not apply if the service provider accepts a client or contract and then fails to fulfill any of its contractual obligations.  Overall, this section of AB 5 appears to be very open and will surely be subject to future interpretation. However, there are no legal or licensing requirements to becoming a “referral agency,” and it would seem any business could do so in order to take advantage of this exemption from the Dynamex decision.

If a swimming pool or spa business does not qualify under the exemptions explained above, they are subject to the Dynamex decision and the ABC Test. If the hiring entity cannot prove each of the elements of the ABC Test, the person hired is an employee and that is presumed as the situation now under California law.

CPSA CANNOT AND IS NOT PROVIDING LEGAL ADVICE. THIS DOCUMENT IS ONLY AN ANALYSIS AS INTERPRETED BY ITS AUTHOR. THOSE SEEKING TO COMPLY WITH THE DYNAMEX DECISION AND AB 5 SHOULD CONSULT OR RETAIN AN ATTORNEY PRACTICING IN THE AREA OF LAW.