On January 1, 2020 California’s Assembly Bill No. 5[1] (“AB5”) went into effect. While AB5 has spurred media attention in the gig-economy, focusing on whether or not Lyft and Uber will leave California[2], the Bill also has substantial effects on the Construction Industry.

AB5 aimed to codify the decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles and clarify its application. The law creates a presumption that workers who perform services for a hirer are employees for purposes of the provisions of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission. Under AB5, all employers must treat contract workers as employees unless “the hiring entity demonstrates that the individual meets all of the specified conditions, including that the individual performs work that is outside the usual course of the hiring entity’s business.”3

The ABC Test

The “ABC Test,” established in Dynamex and codified in AB5, states that a worker is an independent contractor only if:

  1. The worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact;
  2. The worker performs work that is outside the usual course of the hirer’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 for the hirer.

All three elements of the test must be satisfied in order to categorize the worker as an “independent contractor.”

The Construction Subcontract Exemption

AB5 specifically excludes construction subcontractors from its coverage, so long as certain factors are met. Per AB5, the criteria for the Construction Subcontract exemption are:

  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.[4]
  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 fire other persons to provide or assist in providing the services.
  6. The subcontractor assumes financial responsibility for the 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.

In order to ensure your Construction Subcontracts meet the requirements of the exemption, and to ensure you are properly classifying all workers, please contact our California construction and employment law partner Camille Joy DeCamp.

Authors: Camille Joy DeCamp, Azar M. Khazian, Mishal Ayaz

[1] Hyperlink to full text of the Bill. See cite below.

[2] This November, Californians will vote on Proposition 22, which, if passed, will essentially define app-based transportation and delivery drivers as independent contractors. 

[3] https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB5

[4] This paragraph does not apply to a subcontractor providing construction trucking services for which a contractor’s license is not required by Chapter 9 of Division 3 of the Business and Professions Code, provided that certain criteria are satisfied.

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