Assembly Bill 5 (AB5) is a law that affects how companies, both in-state and out-of-state, do business throughout the state of California. This anti-gig economy bill tightens up the rules about which workers may be classified as independent contractors versus employees. Believed to have been designed to target app-based platforms such as Uber and Lyft, this bill has major implications for many other industries in California. As such, we foresee that worker misclassification suits will grow in the upcoming months. To help you and your business navigate the complicated nature of AB5, here is how AB5 affects accountants.

What is Assembly Bill 5 (AB5)?

Assembly Bill 5 (AB5) is a state law that’s been in effect since January 1, 2020. Codifying the “ABC” test, AB5 sets this test as a default standard for worker classification throughout the state of California. Essentially, the test determines whether a worker is an employee as opposed to an independent contractor. For the hiring entity to classify a worker as an independent contractor, it must demonstrate that all the following conditions of the “ABC” 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.

Based on the Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) ruling, the “ABC” test transforms 30 years of worker classification law from the multi-factor test set forth in the California Supreme Court case, entitled S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) (“Borello”). Parts B and C are two new factors that were never before part of California’s independent contractor analysis under Borello.

The passage of AB5 was not well-received throughout many industries in California. In fact, it led to intense lobbying and public relations campaigns from many companies, particularly from Uber, Lyft, and other gig companies who are currently on track to release a new ballot initiative called Proposition 22 in the upcoming November general election. 

In response, California Governor Gavin Newsom signed a new law on September 4th, 2020, titled Assembly Bill 2257 (AB2257). Under AB2257, the “ABC” test remains the default standard for the independent contractor-employee classification. But there are now a number of new statutory exemptions from the “ABC” test, which apply retroactively where applicable, as well as changes to existing exemptions. Businesses must once again adapt to another shift with the passage of AB2257. 

In-State Licensed Accountants are Exempt from AB5

The good news is that under AB5’s “Occupational Exemptions” (and AB2257), accountants have been granted an exemption, along with attorneys and direct salespeople. But not all accountants are exempt. The exemption only applies to accountants holding an active license from the State of California.

To be precise, AB5 states that the “Occupational Exemptions” only applies to:

“…an individual who holds an active license from the State of California and is practicing one of the following recognized professions: lawyer, architect, engineer, private investigator, or accountant.” 

This means that those without an active in-state license are subject to the ABC test, outlined above. The burden is on the employer to prove that the non-California or unlicensed accountant in question is an independent contractor by proving all three prongs of the test. 

We foresee that many accounting and bookkeeping firms who hire unlicensed California accountants will run into difficulties, especially with proving part “B” of the test. An unlicensed accountant working for an accounting firm would fail that criterion because accounting is part of the usual course of the firm’s business. So if you’re paying unlicensed California accountants or bookkeepers as independent contractors, you’re probably going to have to rehire them as employees — regardless of whether or not your firm is located in California. 

Similarly, CPAs with inactive licenses or CPAs with out-of-state licenses fail to qualify for the “Occupational Exemptions” and will be dictated by the ABC test. 

Key Takeaways

Companies that work with accountants, particularly accounting and bookkeeping firms, must check if their accountants are licensed in California. If not, these employers will be subject to the ABC test instead of the Borello test. We recommend companies engage legal counsel to assist with an independent contractor analysis and to craft independent contractor agreements that clearly demonstrate that the accountant meets the applicable standards to avoid potential litigation. 

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.