Some California HR Administrators Exempt from 'ABC Test' for Independent Contractors

A California law that takes effect in the new year has thrown businesses and gig-economy workers into turmoil as they scramble to determine whether independent contractors must be reclassified as employees.

California HR professionals who provide consulting services, however, aren't panicking. Along with others who provide "professional services"—including veterinarians, lawyers, grant writers and travel agents—they were exempted from meeting the law's three-pronged test that determines whether gig workers should be considered employees and therefore be eligible for benefits.

AB 5 specifically exempts anyone who is an "administrator of human resources, provided that the contracted work is predominately intellectual and varied in character and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time."

That description applies to the services that several California-based HR consultants say they and their workers provide. Mike Letizia, SHRM-SCP, and his two employees serve about 40 small and midsize companies that have either a sole HR staffer or none. Stockton-based Letizia HR Solutions offers training, consultation, audits, and updates to policies and employee handbooks.

"There would be disaster, truly, if we were not able to help those businesses," said Letizia, the company's president and chief executive officer. His clients use his services because they aren't big enough to afford a full-time HR administrator.

HR Consulting Gigs

HR consulting business e-VentExe, located north of Sacramento, sends its six employees on long-term assignments at small businesses, where they handle recruiting, training and development, and strategic planning, said owner Amelya Stevenson, SHRM-SCP.

When clients opt to hire her workers, those people transition from being her employees to theirs.

[SHRM members-only toolkit: Complying with California Wage Payment and Hours of Work Laws]

Abbracci Group's three principals love their gig work, said CEO Keri Ohlrich, who noted that many HR consultants are former HR executives who relish being their own bosses. The Pasadena-based consultancy serves businesses of all sizes, from startups to large corporations, in fields ranging from printing to technology. About half its clients are based in California. Abbracci's smaller clients, with 15 to 20 employees, can't afford and don't need a full-time HR professional, and even its larger ones are better served by a consultant who provides coaching or strategic and tactical advice, Ohlrich said.

Under the new employment law, independent contractors in professions that aren't exempt from compliance must meet all three parts of a so-called ABC test to show that they should not be classified as employees: The business that hires them cannot control or direct their work; they must perform tasks outside the hiring entity's usual course of business; and they must have an independent, established business.

Some businesses that hire independent HR contractors may, out of an abundance of caution, want them to meet those three conditions as well, said Michael Kalt, an attorney with Wilson Turner Kosmo in San Diego and director of government affairs for the California State Council of the Society for Human Resource Management.

"If I were an employer," he said, "here's what I'd want to see from my HR contractors: a business license; a SHRM [certification], perhaps; and evidence that they're working for multiple entities. Because if you're an HR professional with a sole client, you're basically an employee who doesn't meet the [three-pronged] test."

Scrutinizing Consultants

California consultants who work for a single client in that client's office for an extended period doing work assigned by the company have been misclassified as independent contractors and need to be hired as employees. Employees receive benefits and legal protections that independent contractors do not. "The longer it goes on and the more exclusive the relationship is, the less likely the exemption would apply," said Eric Lloyd, an attorney with Seyfarth Shaw in San Francisco.

The new law's carve-out for HR administrators applies to professionals "who come in to address a particular situation or task a company is facing and on an as-needed basis only," not those who are assigned routine tasks like maintaining files, Lloyd said.

HR professionals weren't the only workers to secure exemptions with caveats. Hairstylists, manicurists and cosmetologists must set their own rates and hours, schedule their own appointments, and have a business license. Marketers must produce work that is "original and creative" and that draws on the creator's "invention, imagination or talent."

Some business groups initially opposed the legislation and then, when they realized it would pass, scrambled to negotiate for exemptions, Kalt said. Exemptions were secured by "the trade groups with the best lobbyists," Assemblywoman Marie Waldron, R-Escondido, told the Los Angeles Times.

Ride-hailing companies Uber and Lyft opposed AB 5 and, along with delivery service DoorDash, have committed $90 million to getting a statewide initiative on the 2020 ballot that would create a new worker category for "network drivers." These workers would receive some benefits, including a guaranteed hourly wage.

"It's a certainty that we will see many of the exemptions challenged by litigation," Lloyd said. "Many exemptions will have to be interpreted by the courts because the language isn't clear and there's no case law explaining how the law should be applied."

June D. Bell, who is based in the San Francisco Bay Area, is a regular contributor to SHRM Online.