A new law (AB5) on how to determine whether California workers are employees or independent contractors has been a hot issue in recent months. In fact, worker misclassification suits have been steadily rising, and we expect to see this number continue to grow in the upcoming months. Not to mention, a new ballot initiative called Proposition 22, which sets out to undo AB5 for many drivers, will be showing up in the upcoming November general election. There has also been recent legislation significantly modifying AB5, entitled Assembly Bill 2257 (AB2257), which was signed into law on September 4, 2020. So in order to shed insight into how businesses can avoid potential litigation, we’ve put together a quick guide on how AB5 affects different professions. Today, let’s dive into how AB5 affects salespeople.

What is Assembly Bill 5 (AB5)?

Assembly Bill 5 (AB5) is a state law that’s been in effect since January 1, 2020. It codifies the “ABC” test, a test that 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 changes 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.

Certain Salespeople are Exempt from AB5

In addition to other exemptions, AB5 exempts specific occupations under specific circumstances, categorizing them as “Occupational Exemptions” from the ABC Test. Similar to attorneys and other professionals, certain types of salespeople (but not all!) fall under AB5’s “Occupational Exemptions”.  For these occupations, the Borello multi-factor test applies when determining whether a worker must be classified as an employee.  

The types of sales occupations exempt from AB5 are limited to direct salespeople, if certain requirements are met, and licensed real estate salespeople. In addition, AB2257 has recently added a new miscellaneous group of exemptions under AB5, including an exemption for manufactured housing salespeople.

For direct salespeople to be exempt from the ABC test, the individual must satisfy the conditions of section 650 of the Unemployment Insurance Code. This law generally requires that in order for a direct salesperson to be compensated as an independent contractor, substantially all of the compensation earned must be based on actual sales and not wholesale purchases, hours worked, or referrals by the individual. There must also be a written contract in place between the individual and the company which states the individual will not be treated as an employee.  

Key Takeaways

Companies that work with salespeople should keep the express limitations of these exemptions in mind and also remember that the Borello test will still apply. We recommend companies engage legal counsel to assist with an independent contractor analysis and to craft independent contractor agreements that clearly demonstrate that the salesperson 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.