Mark Pestronk
Mark Pestronk

Q: With the recent legislative passage of the California law exempting travel advisors from the Dynamex court ruling, I have some questions: Does the law apply to my non-California agency with one or two ICs in California? What, exactly, do I have to do in order to take advantage of the law? If I take advantage of the law, are my ICs automatically free from the risk of reclassification as employees?

A: Assembly Bill 5, signed into law by Gov. Gavin Newsom last week, applies to ICs located in California, regardless of the location of your agency. So, if you have even one IC in California, you ought to try to meet the law's criteria for exemption, even though you are probably not very likely to get audited by that state.

Here are the criteria for exemption for each California IC (the IC must meet all of them):

1. The IC must have a business location, which may include the IC's residence, that is separate from the host, although the IC is not prohibited from also working at the host's location.

2. The IC must get a local business license no later than six months after the law becomes effective.

3. The IC must have the ability to set or negotiate his or her own rates for the services performed.

4. The IC must have the ability to set his or her own hours, although you can require that those hours be "reasonable business hours."

5. The IC must be "customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work."

6. The IC must customarily and regularly exercise discretion and independent judgment in the performance of the services.

7. The IC must have a California seller of travel registration or must be exempt from registration under that law.

The new law makes clear that the IC can be either an individual or a legal entity such as a corporation or limited liability company.

Probably the vast majority of California ICs will be able to meet these criteria. Unfortunately, meeting the criteria will not mean that your relationship will never be subject to reclassification; it just means that the pre-Dynamex law applies.

The pre-Dynamex law is called the "Borello" or "right to control" test, and it states that the host must prove that the host does not have the "legal right to control the manner and means of accomplishing the result desired."

To determine whether the host can prove this, an auditor can examine many factors, including: 1) whether the host has the right to terminate the IC at will; 2) whether the IC supplies his or her own tools and place of work; and 3) whether the work is a part of the regular business of the host.

California state auditors tend to determine that typical IC relationships fail the Borello test, so even if you meet the Dynamex criteria, you may need to take steps to avoid failing the Borello test.


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