Assembly Bill 5 (AB 5) codified a 2018 California Supreme Court decision that defined whether workers are classified as employees or independent contractors. AB 5 went into effect by amending portions of the California Labor Code on January 1, 2020.
The classification of the relationship between the hiring organization and the worker affects many essential considerations. These issues include paying taxes and applying state labor laws, such as workers’ compensation and unemployment compensation insurance. In addition, the repercussions of misclassifying workers can be severe. For instance, nonprofit organizations and other businesses can face penalties from the IRS for failing to remit taxes, including personal liability for board members of nonprofit organizations, in some cases.
Understanding the “ABC Test”
As a result, under current California law, a person who works for pay is an employee of the hiring organization unless the organization-worker relationship meets a three-part test.
- The worker is free from the control and direction of the hiring organization concerning work performance, both under the contract and in actual practice.
- The worker performs duties that are outside the usual course of the business of the hiring organization.
- The worker customarily works in an independently established trade, occupation, or business involving the type of work being performed for the organization.
If the worker meets all three parts of this test, then the worker is an independent contractor rather than an employee.
Exceptions to AB 5
However, AB 5 states that the test for determining the relationship between a hiring organization and a worker is different if the worker is providing “professional services.” The definition of professional services is lengthy, but it includes services provided by travel agents, grant writers, marketing professionals, tax preparers, freelance writers, photographers, and even licensed barbers and cosmetologists in some circumstances. For these workers, nonprofit organizations must apply a more detailed text to determine whether the workers are employees or independent contractors. This test involves considerations such as:
- Whether the individual has a separate business location
- Whether the individual has a business license
- Whether the individual performs similar contract work for other organizations
Bona Fide Business-to-Business Relationships
In some cases, an exception also exists for business entities that contract to provide services to another business entity. While various criteria determine whether a bona fide B2B relationship exists, one such consideration is that the contract should be in writing.
Due to these complex rules for different types of workers, nonprofit organizations should be careful to have specific procedures in place to ensure that all parties involved are aware of the nature of the hiring relationship. Contracts should be in writing and contain all relevant considerations that apply to that particular type of job. All parties involved should be clear that the person is being hired as a contractor and not an employee, and be sure not to overstep any of the conditions that govern the relationship between the organization and contractor.
Contact Us Today for Legal Assistance Church Law Center gears its practice to legal matters that affect nonprofit organizations, churches, and other religious organizations. This focus allows us to concentrate our efforts on keeping abreast of the ever-changing laws and policies as they develop over time. We are here to represent your interests throughout every stage of your legal matter. Call us today at (949) 245-3177 and see what we can do for you.