AB5 Construction Exemption – A Checklist to Avoid Application of AB5’s Three-Part Test

Construction companies have a unique opportunity to avoid the application of the restrictive new independent contractors’ law that took effect this year. This article provides a checklist that will help construction companies determine whether their relationships with subcontractors qualify for this exemption. 

California’s Assembly Bill 5 (“AB5”), which went into effect Jan. 1, 2020, enacts into a statute last year’s California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), and the Court’s three-part standard (the “ABC test”) for determining whether a worker may be classified as an employee or an independent contractor. 

Certain professions and industries are potentially exempt from this standard, including the construction industry. The ABC test does not apply to the relationship between a contractor and an individual performing work pursuant to a subcontractor in the construction industry if certain criteria are met. In order for the “construction exemption” to apply, the contractor must demonstrate that all of the following criteria are satisfied. 

1. The subcontract is in writing;

2. The subcontractor is licensed by the Contractors State License Board and the work is 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 has the required business license or business tax registration;

4. The subcontractor maintains a business location that is separate from the business or work location of the contractor;

5. The subcontractor has the authority to hire and to fire other persons to provide or assist in providing the services;

6. The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided; and

7. The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.

The contractor must be able to establish each of the above criteria for the construction exemption to apply. If the contractor is successful, the long standing multi-factor test for determining independent contractor vs. employee status as described in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations, 48 Cal. 3d 341 (1989) will apply. 

You should review your processes and procedures for engaging subcontractors to ensure that you can satisfy the above criteria. If you have questions about the application of AB5, the construction exemption, or the Borello factors, you should speak with an attorney.