5 Tips for Managing Independent Contractor Compliance

We hear quite a few questions about independent contractor status in California, and how California companies can comply. Generally, an individual in California is considered an employee and not an independent contractor, unless ALL of the following conditions are satisfied:

• The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
• The worker performs work that is outside the usual course of the hiring entity’s business; and
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

To help you achieve this, we’ve outlined the following

5 Tips for Managing Independent Contractor Compliance

Tip 1: Know which Professions are Exempt. 

When companies contract work to professionals who are exempt from AB5, courts will use a less stringent legal test should a misclassification issue arise. If an individual is exempt from AB 5, a court will use the Borello test to determine if the individual is truly an independent contractor.  The Borello test relies on multiple factors, including whether the potential employer exercises “the necessary control over the manner and means of accomplishing the result desired.” This test considers factors like payment terms, the duration of engagement, and whether the potential employer and the worker believe they are creating an employer/employee relationship in determining the nature of the relationship between the parties. 

Examples of exempted professions:

Licensed insurance professionals, certain health care providers (including veterinarians), lawyers, architects, engineers, private investigators, accountants, securities broker-dealers, investment advisers, certain direct sales salespersons, and certain commercial fishermen were initially exempted under AB 5. A later bill, AB 2257, went on to exempt professionals operating across a range of industries including certain marketing professionals; certain human resources contractors; certain professional travel services; graphic designers; grant writers; fine artists; payment processing agents; certain photographers, videographers and photo editors; certain freelance writers, translators, editors, copy editors, illustrators or cartoonists; certain content contributors, advisors, producers, narrators, or cartographers; certain licensed estheticians, electrologists, manicurists, barbers, and cosmetologists; certain specialized performers; appraisers; and registered professional foresters. Several other exemptions apply, including those set out under Proposition 22, AB 1506 and AB 1561.

If you’re uncertain about whether a contractor is exempt from AB5, we suggest checking with your legal counsel. 

Tip 2: Ensure Your Independent Contractor Agreements Promote Compliance with the Test Requirements. 

Any contract outlining the terms of a relationship is the first line of defense if the status of a contractor is challenged. As such, you should ensure your independent contractor agreements include details that distinguish the contractor from an employee under the relevant legal test. 

While we recommend you consult with legal counsel when working with contractors and developing compliant agreements, you should consider the following:

• Require the independent contractor to have a registered business. 
• Outsource entire projects or fixed-term or short-term projects and leave it up to the contractors to determine when and how the work is completed. 
• Require the contractor to provide their own equipment, tools, and personnel to complete the work.

Read our blog post on Essential Terms for Contractor Agreements.

Tip 3: Ensure Your Processes Respect Independent Contractor Status. 

If you treat a worker like an employee, not an independent contractor, they will likely be deemed an employee, whether using the AB 5 test or the Borello test. You should ensure you have processes in place to differentiate between employees and contractors. 

Some examples of processes:

• Do not require independent contractors to maintain set hours. 
• Acknowledge there is a reduced level of oversight with independent contractors. You can include milestones in the contract to evaluate a contractor’s progress at set intervals. But you cannot expect to have the same level of control as with employees. 

Tip 4: Consider Asking the Independent Contractor to Provide Their Own Insurance. 

If the work product sought is something that might require insurance, you can require the independent contractor to obtain the insurance. Asking the contractor to provide their own insurance is evidence of:

• The independent contractor using their own tools; and/or 
• The contractor is operating without supervision or control.

Requiring an independent contractor to obtain insurance does not by itself prove contractor status but it is a step in the right direction.  

It’s also important to bear in mind that requiring contractors to obtain insurance likely will increase their costs of performing services.  Contractors may therefore increase their rates or turn down the potential project.  Insurance requirements may deter talented workers in certain circumstances.  We suggest you reach out to legal counsel to assist with negotiating this particular provision of your agreement.   

Tip 5: Don’t Attempt to Misclassify Employees.

You should not view AB5 as a challenge. Where contractors are operating as employees, California businesses should plan to bring them on as employees. While this may seem more expensive in certain cases, it is the price you must pay for running a business. And it will (most likely) be more cost-effective than defending a lawsuit down the road. 

If you need assistance navigating independent contractor laws in California, reach out. We’re here to help. 

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