A continued heated topic in employment law, the impact of Assembly Bill 5 (AB5) has been wide-reaching, going as far as affecting parents looking to hire at-home tutors for their children. It has made many businesses vulnerable to misclassification liabilities and unsurprisingly, worker misclassification lawsuits have been on the rise. To shed light on the complexities of AB5 and help you safeguard your business, here is a simple guide on how AB5 affects tutors.

What is Assembly Bill 5 (AB5)?

Effective January 1, 2020, Assembly Bill 5 (AB5) is a state law that codifies the “ABC” test, set forth in the Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) ruling. The “ABC” test determines whether a worker is an employee as opposed to an independent contractor, and places the burden on the hiring entity, or referral agency, to prove otherwise. As of now, this test continues to be the default standard for classifying independent contractors and has been further enforced by a recent legislation, Assembly Bill 2257 (AB2257), that amends certain sections of AB5.

To classify a worker as an independent contractor, it must demonstrate that all the following conditions of the test are satisfied:

1. The person is free from the control and direction of the hiring entity in the performance of the work.
2. The person performs work that is outside the usual course of the hiring entity’s business.
3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Parts B and C are two new factors that were never before part of California’s independent contractor analysis under Borello, the previous multi-factor test from S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989).

How AB5 Affects Tutors: Tutors May Be Exempt

Under one of AB5’s exemptions, tutors that are hired through a referral agency may be exempt from AB5. Referral agencies are businesses that connect customers to a specifically defined group of service providers, including tutors and other types of service providers like dog walkers and graphic designers. Only tutors hired in this manner will potentially qualify under this exemption, however, so this AB5 exemption would not apply to other types of tutors like public school tutors or at-home tutors hired directly by parents.

In order to qualify for this exemption, the tutoring business obtaining jobs through a referral agency must meet the following requirements:

• Is free from the control and direction of the referral agency while working for the client
• Has all required business licenses or business tax registration
• Has the required contractor’s license, if the work requires a state contractor’s license
• Must certify to the referral agency that they have the appropriate professional license, permit, certification, or registration for the work being performed for the client
• Delivers services to the client under the service provider’s name, rather than the name of the referral agency
• Provides its own tools and supplies to perform the services
• Customarily engaged in an independently established business of the same nature as work performed
• Maintains a clientele without any restrictions from the referral agency and is free to seek work elsewhere, including through a competing agency.
• Sets its own hours and terms of work and is free to accept or reject clients and contracts
• Sets its own rates for services performed, without deduction by the referral agency

If all the above is satisfied, the independent contractor status of the tutors will be governed by the Borello test instead of the “ABC” test.

Potential Liabilities for Misclassifying Your Tutor

Willful misclassification is defined as voluntarily and knowingly misclassifying an employee as an independent contractor, which is unlawful pursuant to Labor Code section 226.8, subdivision (a)(1). Any business or employer willfully misclassifying their tutors or service providers as independent contractors will be subject to civil penalties of $5,000 to $15,000 per violation.

On top of these civil penalties, they will be faced with other penalties such as unpaid income taxes, IRS code penalties, FICA (Social Security) & Medicare contributions, unpaid minimum wages & overtime wages, and more – all of which can accumulate into one hefty fine.

Key Takeaways

Tutors have become extremely popular in the age of COVID-19, with many parents choosing to utilize tutors for their children during school shutdowns and remote learning.  It is now more important than ever to correctly classify your tutors, especially as frustrations and lawsuits continue to rise over worker misclassifications. Employers and businesses seeking to take advantage of the Referral Agency exemption should exercise care and caution when implementing an agreement and course of conduct with tutoring businesses that satisfy the requirements listed above.

In order to avoid the probable risk of misclassification under AB5, we recommend all referral agencies to engage legal counsel for all independent contractor analyses and written independent contractor agreements.

If you need any assistance with an independent contractor analysis or crafting a legally compliant independent contractor agreement, contact Hackler Flynn & Associates.

DISCLAIMER: Content within this post should not be considered legal advice and is for informational purposes only. Communications made through this post do not create an attorney-client relationship. Hackler Flynn & Associates is not responsible for any content that you may access from third-party resources that may be accessed through or linked to this post. Hackler Flynn & Associates is only licensed to practice in California.