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Assembly Bill 5 (Gonzalez), the Dynamex codification bill backed by organized labor, heads to its second policy committee hearing this week sporting new construction industry and business-to-business (B2B) amendments that provide additional flexibility. Since its introduction, California Pool & Spa Association (CPSA) has been working with the sponsors of the bill and committee consultants on ways the bill might be structured to provide more flexibility, especially in the construction and pool/spa industries. “It’s not a matter of what is right or wrong with various employment situations,” noted John Norwood, Chief Lobbyist for CPSA. “It’s about finding a balance that supports legitimate business relationships so the law is fair to all parties. We have pool service businesses that use the employee model, pool builders who contract out pool service, and individual pool service professionals who share work with other pool service professionals where they cannot serve those clients due to volume or geography. However, at the same time, we want to make sure businesses are not taking advantage of using the underground economy to unfairly compete against legitimate businesses.”

Amendments that have been circulated for input would add two additional exemptions to the Dynamex ABC Test. The proposed construction industry amendment would be specifically exempt from AB 5 and the Dynamex decision, the relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry. The proposed language would instead provide the employment relationship shall be governed by the test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, if the contractor demonstrates that all the following criteria are satisfied.

  1. The individual is free from the control and direction of the contractor in connection with the performance of the work, both under the contract for the performance of the work and in fact
  2. the subcontract is in writing
  3. the subcontractor is licensed by the Contractors State License Board and the work is within the scope of that license
  4. if the work is performed 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
  5. the subcontractor maintains a business location that is separate from the business or work location of the contractor
  6. the subcontractor has the authority to hire and to fire other persons to provide or to assist in providing the services
  7. the subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, performance bonds or warranties relating to the labor or services being provided
  8. the subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed

This new language should alleviate most of the concerns relative to the construction industry as it returns the determination of whether a person hired is an employee or an independent contractor to the Borello standard, which has been used in California for decades.

The second set of amendments are designed to allow for B2B relationships and contracts between business entities to share work, which specifies the Dynamex decision does not apply to the relationship between a business entity and an individual performing work pursuant to contract with another business entity to provide services to the contracting business. Instead, the employment relationship shall be governed by the Borello standard, if the contracting business entity demonstrates that all the following criteria are satisfied:

  1. The service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact
  2. the service provider is providing services to the contracting business rather than to customers of the contracting business
  3. the contract with the service provider is in writing
  4. if the work 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 maintains a business location that is separate from the business or work location of the contracting business
  6. the service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed
  7. the service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity
  8. the service provider advertises and holds itself out to the public as available to provide the same or similar services
  9. the service provider has no other financial relationships with the contracting business
  10. the service provider can negotiate its own rates, provided that the rate is equal to or greater than two times the minimum wage for hours worked
  11. the service provider can set its own hours and location of work
  12. the service provider is not performing the type of work for which a license from the Contractor’s State License Board is required

CPSA has received calls from some association members in the pool service industry complaining that their insurer has required they pay for workers’ compensation coverage for other pool service professionals where they have shared work between the companies. This language would be seen to deal with this and other situations wherein small businesses share work between entities.

The common thread in both of these proposals is exempting these situations from the Dynamex decision eliminates the B prong of the ABC Test, which is the most troublesome for most industries and businesses. Under the B Test in Dynamex, the hiring entity must prove the employed person performs work that is outside the usual course of the hiring entity’s business in order to claim that the person hired is an independent contractor as opposed to an employee.

AB 5 is scheduled to be heard in the Senate Labor, Public Employment and Retirement Committee on Wednesday, July 10. It is expected that whatever the content, once it passes this committee, the bill will continue to be subject to continuing negotiations through the Legislature’s summer recess, from July 12 through August 12.

We will keep you updated as more information is available.