Attorney Articles | AB5 and the Independent Contractor

Articles by Legal Department Staff

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AB5 and the Independent Contractor

CAMFT’s Deputy Executive Director, Cathy Atkins, JD, discusses changes to California law, and the new test employers must use to determine if their independent contractors classification is legally permissible.

AB 5 and the Independent Contractor Psychotherapist in California

Cathy Atkins, JD
CAMFT Deputy Executive Director
The Therapist
January/February 2020

Over the last two years, and more significantly starting January 1, 2020, there have been major changes in what is legally permissible when using independent contractors in a California work setting. CAMFT strongly recommends that any employer, or work setting, using independent contractors have their business model assessed by an employment attorney or human resources specialist immediately.

This article reviews the major changes in California law that affect independent contractors, the impacts these changes have on work setting situations for licensed psychotherapists, and the questions employers should be contemplating and discussing with the employment attorneys/human resources specialists with whom they consult. It is important to recognize that this article will not provide any specific legal advice for employers, as each setting has numerous variables that need to be individually assessed.

NOTE: This article does not address pre-licensee employment scenarios, as pre-licensees cannot work as independent contractors when gaining hours.

Historical Classification of Independent Contractors

Over the last thirty years, there have been numerous shifts on how employers must assess independent contractor classification:

The Borello Test---From 1989 to 2018, the independent contractor test was “the Borello Test” based on a California Supreme Court decision, Borello & Sons, Inc. v. Department of Industrial Relations (1989). Under Borello, the employer had to use a multi-factor test to assess whether the contractor was free from direction and control of the employer, among other factors. The full Borello Test is outlined below.

The Dynamex Case--In 2018, the California Supreme Court adopted a new legal standard called “the ABC Test” in Dynamex Operations West v. Court (2018). Instead of applying the multi-factor Borello Test, the Court held that a worker was presumed an employee unless the employer established that A) the worker was free from control and direction, B) the work was performed outside the usual course of business, and C) the worker was engaged in an independent business.

Assembly Bill 5 Legislation—In 2019, California Assembly Bill 5 (AB 5), codified the ABC Test and made it applicable to all (non-exempted) California work settings as of January 1, 2020. AB 5 was very controversial throughout the labor, business, and professional organizations in California—CAMFT was opposed to this legislation. The specifics of AB 5 are reviewed in detail below.

How does AB 5 Affect Mental Health Professionals in California?

Three sections of AB 5 affect work settings where psychotherapists likely work in California. Because of the complicated nature not only of AB 5, but of the psychotherapist’s practice as well, we recommend bringing the following questions with you when you seek employment/human resources consultation:

Exempted Professions2

AB 5 specifically exempts certain professions from the ABC test; and instead, requires assessment of the worker under the Borello test (as outlined below). Some of the exempted professions include physicians, lawyers, and psychologists. NOTE: CAMFT advocated with LPCCs, LCSWs, and psychologists for exemption; at the 11th hour, psychologists were exempted but not Masters-level psychotherapists.

The Borello Test

A. The primary test factor is “whether the employer has the right to control the manner and means (hours, location, etc.) of accomplishing the result desired?”

B. The secondary test factors include:

i. Whether there is a right to terminate at-will without cause;
ii. If the worker is engaged in a distinct occupation or business;
iii. If the work is the kind usually performed under close direction or by a specialist without supervision;
iv. The skills required in the particular occupation;
v. If the employer or worker supplied the instruments, tools and place for performing the work;
vi. The length of time for which the services are to be performed;
vii. The method of payment, whether by time or by job;
viii. If the work is part of the hiring entity’s regular business; and,
ix. If the parties believe, they are creating an employer/employee relationship.

Business to Business Contracts3

AB 5 allows an exemption in certain business arrangements, when the employer and independent contractor are perceived as two businesses working together, so long as all of the below criteria are satisfied. NOTE: We have bolded the criteria that will be more challenging for an employer to overcome.

  1. The independent contractor has a business that is formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation; 
  2. The independent contractor is free from the control and direction of the work setting/employer in connection with the performance of the work, both under the contract for the performance of the work and in fact; 
  3. The independent contractor is providing services directly to the employer rather than to customers of the employer;
  4. The contract is in writing; 
  5. A business license/tax registration is present if required in the business’s jurisdiction; 
  6. The independent contractor maintains a business location that is separate from the business or work location of the employer; 
  7. The independent contractor is customarily engaged in an independently established business of the same nature as that involved in the work performed; 
  8. The independent contractor actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity; 
  9. The independent contractor advertises and holds itself out to the public as available to provide the same or similar services; 
  10. The independent contractor provides its own tools, vehicles, and equipment to perform the services; 
  11. The independent contractor can negotiate its own rates; and, 
  12. Consistent with the nature of the work, the independent contractor can set its own hours and location of work.

If the above criteria were satisfied, the employer would then use the Borello Test (outlined above) to determine if the worker can be classified as an independent contractor. If the above criteria were not satisfied, the employer would use the ABC Test (outlined below).

The average mental health setting using independent contractors to do counseling will unlikely be able to satisfy the “business to business” exemption, especially the prong about services directed at employer rather than customers/clients. However, certain business arrangements might be worth exploring further with an employment attorney if the above questions pass muster. For example, one vulnerable area we see worth pursuing is a supervisor providing supervision to pre-licensees only at multiple sites, versus (or in addition to) providing therapy to patients.

All Other Work Settings and the ABC Test4

Unless the person hired is a specifically exempted professional (i.e., a psychologist) or exempted through the “business to business” exemption (outlined above), all other work arrangements now fall under the ABC Test to determine if the worker must be classified as an independent contractor. Remember, the ABC Test under AB 5 mimics that of Dynamex, and all three prongs must be satisfied in order to classify a worker as an independent contractor.

The ABC Test

A. The independent contractor is free from control and direction of the employer (both under contract and in fact); B. The independent contractor is performing work that is outside the usual course of the hiring entity’s business; and, C. The independent contractor is engaged in an independently established business of the nature as the work performed for the hiring entity.

Similar to the “business to business” exemption above, most mental health employers will not meet the requirements of this section. However, it is worth exploring further with your employment attorney or human resources generalist if an employer feels that the contractor is able to satisfy all three prongs above.

Some questions to consider for employers when reviewing the above three prongs with your attorney or human resources specialist:

  • Prong A: It is helpful to use the Borello factors with your employment attorney here as an assessment tool. 
  • Prong B: Is the independent contractor really performing a different type of work than the employer? Are there therapists working for the employer doing similar work as the independent contractor? For example, is the supervisor providing only supervision but not therapy services to the mental health agency? Is the therapist providing therapy to the school’s students? Is the therapist providing therapy to, for example, the OBGYN’s fertility clients? 
  • Prong C: Is the independent contractor an entity (such as a sole proprietor)? Does the independent contractor provide services to numerous different work settings? Does the independent contractor hold themselves out for hire by numerous work settings?

Flow Chart of Independent Contractor Tests

Flow chart of Independent Contractor Tests

For further clarification, the California Department of Industrial Standards put together a FAQ sheet that can be viewed here.

Damages for Misclassification

The penalties for misclassification of a worker (employee v. independent contractor) are significant. Under California Labor Code § 226.8, employers are subject to a civil penalty between $5,000 to $15,000 for each violation for willful misclassification of an individual as an independent contractor. If it is found to be a pattern (i.e., numerous employees misclassified), the civil penalty is between $10,000 and $25,000 for each violation.

Independent contractors could also be entitled to recover all expenses or damages incurred because they were improperly classified as independent contractors, such as additional tax liability, benefits, wages, meal break penalties, rest break penalties, wage statement penalties, waiting time penalties, unpaid overtime, minimum wage and expense reimbursements related to operating personal vehicles for business purposes and operating personal cell phones for business purposes. Contractors would also be entitled to recover interest, costs and attorneys’ fees.

In addition to the costly monetary penalties, employers who misclassify are required to post a “prominent” notice on their public website stating, among other things, that they have “committed a serious violation of the law” by willfully misclassifying employees, and directing any other employees who feel they have been misclassified to contact the Labor and Workforce Development Agency.

So, What Does This All Mean?

Employers—If you have independent contractors working for your business, it is essential that you seek counsel from either your company’s lawyer, an outside employment attorney, or minimally a human resources specialist to ascertain whether you are in violation of AB 5’s new legal standards. The new ABC Test and numerous exemptions with AB 5 are complicated, and you will need expert guidance to ensure that you are not subject to excessive fines and penalties. In some work situations, transferring your workers from independent contractors to employees may be less difficult and costly than many believe. The attorney or human resources specialist you meet with can guide you through the process of switching from the independent contractor model to the employee model.

Independent Contractors—If you are happy with your current arrangement with your work setting, you are under no legal obligation to assess the legality of the situation and are not subject to the penalties and fines above. However, if you are unhappy with your arrangement, before taking legal action, we recommend bringing this article to your employer to begin a conversation to see if you can develop a win-win scenario. In addition, if your employer has discussed terminating your employment because of AB 5, it is worth talking to them about converting you to an employee.

What is Next?

CAMFT is working with many professional stakeholder groups (including LCSWs and LPCCs) in 2020 to advocate for an exemption for Master level psychotherapists, like the exemption given to psychologists, to afford greater and more diverse work opportunities throughout California. We ask that you follow our grassroots efforts in Sacramento and respond when you see a Call to Action to write/call your state representatives. In addition, there have already been two lawsuits filed in federal court challenging AB 5.

NOTE: As we have begun researching these changes in law, and speaking with members affected, it appears that numerous employers were misclassifying their independent contractors even under the pre-2018 Borello Test. The reason we notate this here, is that if CAMFT is successful in exempting Marriage and Family Therapists in 2020, we still recommend seeking employment law guidance under the Borello Test if you have independent contractors working for your practice, agency, school, or other organization.

1This article uses “employer” interchangeably with “work setting” for ease of understanding by reader.
2Labor Code section 2750.3(b)(2)
3 Labor Code section 2750.3(e)(1)
4 Labor Code section 2750.3(a)(1)