“On September 18, 2019, Governor Gavin Newsom signed Assembly Bill 5 (AB 5) into law. This codified the California Supreme Court case decision in Dynamex 1 in which the court created a new test – the “ABC test” — for determining whether a worker is an independent contractor or employee. The court’s decision changed years of prior law, restricting the ability of employers to use independent contractors. The bill became effective January 1, 2020. Now, rather than leaving this determination up to the courts and administrative agencies, AB 5 codified the ABC test into law, and carves out some narrow exceptions.
The ABC Test Thwarts Physical Therapist Contractors
The court in Dynamex held that a worker is presumed to be an employee unless the company proves that the worker:
A. Is free from the control and direction of the company in performing work, both practically and in the contractual agreement between the parties; AND
B. Performs work that is outside the usual course of the company’s business; AND
C. Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company.
While many independent contractor physical therapists meet Section A of the test and work for several practices, Sections B and C are the troubling parts of the test. If a physical therapy practice hires a contracting physical therapist to treat patients, the contractor is working “in the usual course of the company’s business” and fails Section B.
Under Section C, the contracting physical therapist nearly has to have his or her own separate practice to contract with another physical therapist to provide care.2 Many therapists who contract for their services fail this section.
To summarize, a worker can only be an independent contractor if the hiring company can prove that the worker is out of the company’s control, performs work outside the company’s primary business, and regularly works independently in the worker’s trade. A physical therapist contractor who works for only one practice, directly providing patient care, fails the ABC test and must be an employee.
Exceptions to AB 5
The Legislature has added several exceptions to AB 5, including physicians, dentists, podiatrists, veterinarians, and psychologists, but physical therapists are expressly absent from the list.3 If a worker meets one exception, the analysis of whether the worker is a contractor or employee falls under the Borello test.
Before Dynamex, California used the Borello test resulting from the prior California Supreme Court decision deciding how to distinguish an independent contractor from employees.4 The Borello test uses 11 factors and focuses mainly on the company’s control over the worker’s means and manner of performing the job. Should a worker be exempt under AB 5, then the work relationship is examined under the Borello factors. We do not examine them here since they likely will not apply to physical therapists.
Along with physical therapists, many other health care professionals lack exemptions from AB 5. Occupational therapists, speech therapists, optometrists, nurse practitioners, physician assistants, radiation therapists, licensed professional clinical workers, respiratory therapists, and audiologists all face the same ABC-test issues as physical therapists.
Bona Fide Business to Business Exception
AB 5 also provides for an exception to Dynamex when the service provider has a business that is providing services to another business known as the “business-to-business exception.” If the business service provider can prove the criteria under this section, then the Borello test applies.
This commonly misunderstood exception is not as simple as it sounds, and in no way excludes small businesses as has been represented to the public. The business service provider must meet all the following to qualify:
• The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
• The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.5
• The contract with the business service provider is in writing.
• If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
• The business service provider maintains a business location that is separate from the business or work location of the contracting business.
• The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
• The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
• The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
• The business service provider provides its own tools, vehicles, and equipment to perform the services.
• The business service provider can negotiate its own rates.
• Consistent with the nature of the work, the business service provider can set its own hours and location of work.
• The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.
Under this exception, one physical therapist practice (business) could seemingly provide physical therapy services to another practice. But the second highlighted criteria above defeats the exception – the physical therapy provider is not providing services to the physical therapy practice itself. Rather, the physical therapist is providing service to the customers/patients of the contracting business. This exemption does not appear to work for physical therapists.6
Impact of AB 5 and Enforcement Risks
AB 5 and the “ABC Test” will make it much easier for workers to claim employers misclassified them as independent contractors. The ABC test will show they are employees and the company has committed these violations, to name a few:
• Failure to reimburse necessary business expenses (Labor Code section 2802)
• Failure to provide accurate and complete wage statements (Labor Code section 226)
• Failure to pay unemployment insurance tax
• Failure to provide workers compensation insurance
The penalties for these violations can range from $5,000 to $15,000, and as high as $25,000 if the violation is found to be a pattern of practice or willful.7 The California Attorney General and certain city attorneys may pursue injunctions against companies who are misclassifying workers. There is also the ability to base Private Attorney General Act (“PAGA”) action claims on Labor Code violations. AB5 became effective January 1, 2020. The ABC test applies for the Unemployment Insurance Code and the Labor Code relating to wage orders. Beginning July 1, 2020, the ABC test will also apply to worker’s compensation.
AB 5 seriously affects non-excluded health care providers discussed above. While many industry and advocacy groups are tirelessly working to carve out an exception for their industry and reform this broad-sweeping bill, all companies need to reevaluate how they hire.
Any practice hiring physical therapists as independent contractors will need to examine the relationship through AB 5 guidelines. Most companies will need to transition workers from independent contractors to employees, even at greater expense, to avoid the risks and penalties described above. Under this landscape, nearly all physical therapy practices fail the ABC test and the business-tobusiness. They should seek legal counsel regarding this developing and complex area to avoid the risks of misclassification, especially into this New Year, as the enforcement of these new rules develops. While enforcement agencies gear up for AB 5, other organizations are working on legislation, and even suing. The trucking industry, freelance media creators, Uber, Lyft, and DoorDash are all challenging the law in court.8 The California Trucking Company is the only one to receive a preliminary injunction allowing its own exemption until the suit is resolved. Meanwhile, the law is in effect, and the enforcement agencies expect compliance.
1 Dynamex Operations v. Superior Court (2018) 4 Cal. 5th 903.
2 AB 5 Flowchart.
3 See newly enacted Labor Code § 2750.3 (b)(2), effective January 1, 2020.
4 S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341.
5 This is the problem element for physical therapists.
6 Business to Business Flowchart.
7 See Labor Code section 226.8
8 California Trucking Association et al v. Xavier Becerra et al United State District Court Southern District of California Case No.: 3:18-cv-02458-BEN-BLM; Western States Trucking Association v. Xavier Becerra United States District Court Central District of California Case No.: 5:19-cv-02447; American Society of Journalists and Authors Inc. and National Press Photographers Assoc. v. Xavier Becerra et al United States District Court Central District of California Western Division Case No.: 2:19-cv-10645; Lydia Olson, Miguel Perez, Postmates Inc., and Uber Technologies, Inc. v. State of California et al United States District Court Central District of California Western Division Case No.: 2:19-cv-10956.
Sasha G. Aguilar is an Associate Attorney with the Government and Administrative Law firm of Simas & Associates, Ltd., in Sacramento, San Luis Obispo, San Jose, and San Diego, California. Ms. Aguilar practices in the areas of Healthcare Regulation, Professional Licensing and Regulation and Workplace and Employment Regulation. The firm has proudly served as legal counsel to the California Physical Therapy Association since 2004 and can be reached at firstname.lastname@example.org.