Courtesy of: Trent Cotney, Cotney Construction Law
The foundation of California’s immense economy is based upon three industries: entertainment, technology and tourism. These industries heavily rely on “gig workers,”, individuals who provide paid services to multiple companies simultaneously and who have traditionally been classified as independent contractors. This structure is very similar to the model used in the construction industry. As California modifies the state employment regulations, construction contractors are wondering how the new “gig worker” law affects their day-to-day business operations and, more importantly, their bottom-line. The change will affect millions of workers statewide, but the good news is the law will likely have little effect on the construction industry right now. While the legislation, Assembly Bill No. 5 (“AB 5”), narrows the definition of “independent contractor”, subcontractors in the construction industry are exempt.
AB 5 seeks to stop the misclassification of workers and grant more individuals eligibility for standard employment benefits such as union memberships, health insurance and an hourly wage. AB 5 exempts specified occupations from application of the new definition and regulation. There are a wide range of exempt occupations such as licensed insurance agents, registered securities dealers, real estate licensees, and those performing work pursuant to a subcontract in the construction industry. It is important to note that this exemption does not apply to subcontractors providing construction trucking services, and those individuals have a separate set of regulations under the law. AB 5 establishes that the exempt individuals performing work pursuant to subcontracts in the construction industry are governed by S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (“Borello”). Borello provides an eleven-factor balancing test which weighs the totality of the circumstances and was the test used in California prior to AB 5.
In addition to requiring the Borello test, AB 5 establishes seven additional requirements. The seven requirements 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, (3) if the subcontractor is domiciled in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor meets the requirement, (4) the subcontractor maintains a business location separate from the contractor’s business location, (5) the subcontractor has the authority to hire and fire other individuals to provide or 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, and (7) the subcontractor is customarily engaged in an independently established business of the same nature of the work performed. If the contractor demonstrates that all seven are met, then the individual will be considered an independent contractor.
As other states decide whether or not to follow California’s lead, AB 5 will have an impact nationally. It is too soon to tell how this will impact the national construction industry long term, but for now, it is safe to say that AB 5’s current effect on the construction industry is minor and your company should continue its business as usual.
Author’s note: The information contained in this article is for general education information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.
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