Updated: 2:17 PM | 26 September 2019 – This article has been updated to reflect changes to the bill made by California Governor Gavin Newsom prior to signing it into law. This updated version reflects the potential impact those changes could have on IT consultants working in California.
On 18 September, California Governor Gavin Newsom signed bill AB 5 into law. The law redefines the relationship between employers and consultants. The law was drafted in response to a state Supreme Court case (Dynamex Operations West, Inc. v. Superior Court of Los Angeles) that made it harder for employers to classify individuals as contract workers, as opposed to regular employees. AB 5 codifies that court case and strengthens contractor rules further.
The initial purpose of the new law was to make people who drive for Uber or Lyft employees of those companies, instead of independent contractors, but the law’s impact is much broader – intentionally so. The bill impacts most Californians who work as consultants or independent contractors, including those in the IT fields. If certain conditions are not met, AB 5 could make it very difficult for many IT independent consultants to continue working as independent consultants in California.
The heart of AB 5 creates three part criteria for determining is someone is an independent contractor. To be an independent contractor, a person must:
- Be free of control and direction of the hiring company
- Perform work that is outside the hiring company’s usual course of business
- Must be customarily engaged in work that is similar to the contracting work he/she has been hired to do
If any part of this “ABC Test” are not met, the person is a regular employee, and therefore eligible for benefits and other perks of the company.
Most IT consultants would fail this test because the companies they work for are in the IT business (although the courts will have to rule on what “usual course of business” means). As such, most consultants in California would be re-classified as employees under this rule.
However, there are two exemptions in AB 5 for engineers which may help. The first of these exempts anyone with a state-issued license from AB 5. This will help some IEEE members, but most electrical and computer engineers, as well as other IT professionals employed in the private sector, are not licensed and practice under the industry-exemption to licensure.
The second exemption relates to Sole Proprietorships, LLCs, and other legal business entities. Independent consultants who have created a legal entity to house their consulting work will be exempted from the new rules if they meet certain conditions.
The specific exemption (Section (e) on page 8 of the law) is for business-to-business contracting relationships. AB 5 dramatically limits companies’ ability to hire consultants, but companies can hire consulting companies, under certain conditions. This means that a consultant who has built a legal entity around his/her work, including LLCs and Sole Proprietorships, can continue to work as an independent consultant.
There are 12 conditions an entity needs to meet to qualify as a “Business Service Provider,” (BSP) and therefore be qualified for the exemption. (In AB 5, the BSP is the consultant and the contracting business is the company for whom the consultant is working.) To qualify for this exemption, the BSP must meet all of these 12 conditions:
- The BSP must be independent from the contracting business;
- The BSP must provide services to the contracting company, not its customers;
- The BSP must have a written contract to work for the contracting company;
- The BSP must have all necessary business licenses required to operate in whatever jurisdiction they are operating;
- The BSP must have a business location that is different from the contracting business (but that can be their residence);
- The BSP must be customarily engaged in work that is similar to work being performed for the contracting company;
- The BSP has contracts for similar work with other companies and can maintain other clientele without restriction from the contracting company;
- The BSP advertises to the general public services similar to those it is performing for the contracting company;
- The BSP provides its own tools, vehicles and equipment to perform the services;
- The BSP can negotiate its own rates;
- The BSP can set its own hours and work location – as allowed by the nature of the work; and
- The BSP is NOT performing work that requires a state license from the Contractor’s State License Board. (This appears to be limited to the construction industry, which has its own exemption.)
IEEE-USA Leadership Reacts
Brian Berg, director and past chair of the IEEE Consultants’ Network of Silicon Valley (CNSV), believes that with the exemptions, requirements of the new law are quite reasonable for independent IT and engineering consultants in California to meet. According to Berg, the new law now in effect encourages, for example, joining an organization such as the CNSV (by way of #8) as each CNSV member is able to edit their own webpage which describes their skills, and which thus advertises their consulting services.
Jacob Beningo, chair of the IEEE-USA Alliance of IEEE Consultants’ Networks Coordinating Committee (AICNCC), believes local consultants networks in California that have not already done so may want to consider creating a website that helps promote their members consultant services. Also, California consultants may want to consider subscribing to the IEEE-USA Consultant Finder to help meet the conditions set by the business-to-business contracting exemption, says Beningo.
IEEE-USA and IEEE leaders, including IEEE-USA President Tom Coughlin, himself a California consultant and a Board member of CNSV, worked with California lawmakers to ensure that the new law did not harm California’s consultant community. While the final law was not exactly what IEEE members asked for, the most damaging rules were dropped before the bill became law.
IEEE-USA remains concerned about the effect this law will have on new consultants. To qualify for the business service provider exemption, consultants need to prove they have taken similar jobs with other companies – which will be hard to do for their first job. Creating a legal shell for consulting work, increased advertising expenses and some of the other criteria will also increase consultants’ costs, further discouraging new entrants into the consulting market.
Several other states are considering laws similar to AB 5. IEEE members are encouraged to watch their local state legislature carefully and to alert IEEE-USA should legislation regulating the gig economy or consultants be added to their state’s legislative agenda.
IEEE members should contact IEEE-USA Director of Government Relations Russ Harrison with information or questions. He can be reached at (202) 530-8326 or email@example.com.