August 2023

 

Dynamix Operations W. v. Superior Court and the subsequent passage of AB 5 represent seismic shifts in independent contractor rules in California.  We have previously provided details of these changes and their impacts. The Recent Evolution of Independent Contractor Laws; California Assembly Bill 5: Drastic Changes to the Healthcare Industry Are Certain and Immediate; California Motor Carriers Are Subject to AB-5; Ten Common Employment Law Violations; New California Employment Laws for 2022; California Employment Law Update 2021.

But how do these laws impact the construction industry, and specifically the relationship between the prime contractor and subcontractors?  AB 5 explicitly exempts the relationship between a prime contractor and subcontractor from the ABC test.  However, to meet this exemption, the prime contractor must satisfy several criteria:

1) The subcontract must be in writing;
2) The subcontractor must be licensed by the Contractors State License Board and the work performed must be within the scope of that license;
3) If the subcontractor is domiciled in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor must have the required business license or business tax registration;
4) The subcontractor must maintain a business location that is separate from the business or work location of the contractor;
5) The subcontractor must have the authority to hire and to fire other persons to provide or to assist in providing the services;
6) The subcontractors must assume financial responsibility for errors or omissions in labor or services as evidence by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided; and
7) The subcontractor must be customarily engaged in an independently established business of the same nature as that involved in the work performed

If a contractor demonstrates those criteria, then the ABC test does not apply, and the relationship is governed by the less stringent Borello factors.  Under Borello, the prime contractor must demonstrate that its subcontractor controls “the manner and means of accomplishing” their work. 

The prime contractor, therefore, should take affirmative steps to ensure that the relationship between it and the subcontractor reflects an independent contractor relationship.  For instance, the contractual agreement between the parties should state that both sides agree that the subcontractor is an independent contractor.  The subcontractor should provide their own tools and set their own work schedule within the needs of the prime contractor’s timeline. The prime contractor should also consider paying the subcontractor by the job or by performance, rather than hourly.

To ensure that they never fall within the ABC requirements, prime contractors should (1) draft all subcontracts in writing; (2) only hire CSLB-licensed subcontractors customarily engaged in an independent business; (3) forego the right to hire or terminate sub-subcontractors or subcontractors’ employees; and (4) require that subcontractors assume liability for labor errors through insurance, indemnity, bonds, or warranties. 

 

For more information contact:

Matthew Wallin

mwallin@gibbsgiden.com

(424) 317-4423

Matthew Wallin is a partner in the Los Angeles office where he practices labor and employment law.  He has extensive experience defending private business and public entities in litigation and advising clients on labor compliance issues.  

This post was prepared with assistance from Taylor Jennings.

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