Are you up-to-speed on the new California labor law that took effect January 1? Known anecdotally as “the gig economy law” and officially as “AB 5,” it aims to prevent employees from being misclassified as contractors.
It’s generating quite a stir among industries like trucking, freelance media and app-based transportation and delivery services that rely heavily, if not exclusively, on contracted workers. On January 21, USA Today noted chaos, confusion and controversy from many corners, reporting that Uber, Lyft and DoorDash had “already poured $90 million into a ballot push for state voters to weigh in on the issue,” hoping to overturn or refine the legislation.
AB 5 brings significant changes for the beauty industry, too, says Los Angeles attorney Robert Roginson of Ogletree, Deakins, Nash, Smoak & Stewart. Roginson has presented and led discussions on labor law for ISBN at Conference in recent years.
“Specifically, AB 5 codifies the ABC test set forth in the California Supreme Court Dynamex decision issued in April, 2018 regarding whether a worker is classified as an employee or independent contractor,” he explains. “AB 5 not only codifies the ABC test but also expands the test to apply to the Labor Code, wage orders, and Unemployment Insurance Code.”
In simple terms, under the ABC test, a person providing labor or services for financial compensation shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
A. The person 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.
B. The person performs work that is outside the usual course of the hiring entity’s business.
C. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Because a worker in the beauty industry would normally be considered to be performing services that are within the usual course of a salon’s business, a salon can never meet the B prong of the ABC test, Roginson explains. All the salon’s workers would be considered employees.
“AB 5 contains an exception, however, that if met by the salon would permit the salon to avoid application of the ABC test,” he says. Instead, the applicable test for determining whether the worker is an employee or independent contractor would be the multi-factor test set forth in the 1989 California Supreme Court case, S. G. Borello & Sons, Inc. v. Department of Industrial Relations.
The exception (or carve-out) is set forth in new Labor Code section 2750.3(c) of AB 5. Under this exception, the Borello test, and not the ABC test, would be used to determine the employee status of a worker in the beauty industry (specifically, a “licensed esthetician, licensed electrologist, licensed manicurist, licensed barber, or licensed cosmetologist”) provided that the individual worker meets all of the following conditions:
- Sets their own rates, processes their own payments, and is paid directly by clients;
- Sets their own hours of work and has sole discretion to decide the number of clients and which clients for whom they will provide services;
- Has their own book of business and schedules their own appointments;
- Maintains their own business license for the services offered to clients; and
- If the individual is performing services at the location of the hiring entity, then the individual issues a Form 1099 to the salon or business owner from which they rent their business space.
The significance of the AB 5 carve out for the beauty industry is that AB 5 sets forth specified conditions for a salon to avoid the ABC test.
Roginson says salons seeking to take advantage of the carve out must exercise care and diligence in implementing an agreement and course of conduct with the worker that meets the five requirements.
“This should be set forth in writing and accurately reflect the actual business relationship between the salon and the worker,” he advises. “Salons which fail to implement these important measures will face a probable risk of misclassification under AB 5.”
What does that mean for a California salon market that has leaned so predominantly toward rental? For multi-unit salons, spas and barber businesses that are 100 percent employee based, it may create some hiring opportunities, but likely some confusion and chaos in the market first.
In the meantime, any salons that do even a limited amount of rental arrangements with service providers should consult with their HR departments and attorneys to be sure they are in compliance.