Does AB5 Affect Your Customer Contracts?

This article is not intended as legal advice. AB5 has changed the landscape of employee/contractor relationships in California, and this is my attempt to help inform our customers and competitors of these changes.

California’s AB5 codifies the court’s decision regarding employees -vs- contractors in Dynamex Operations West, Inc. v. Superior Court. The court found that most workers are actually employees and can’t be classified as contractors. This decision seems fairly straight forward until you delve into the rules that were codified. The relationship between a contractor and the contracting business in a business to business relationship appears to be clear until looked at through this new law.

Like the Borrello ABC test that is used to determine whether an individual is an employee or can be treated as a contractor, the Business to Business relationship has to completely meet 12 separate requirements in order that the contracting business not be considered an employer of you or your employees. These requirements are listed below with comments and questions on what they can imply.

To make this dense subject easier to read and understand I will be using two companies as examples. Bob’s Scale Service is a weighing equipment service and repair company. Bob’s provides calibration services for other businesses. Ohm Electronics is a manufacturing firm that has scales that need to be calibrated by an independent company.

The rules for the B2B exemption: (Italics = excerpts from AB5)

The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

  • Bob’s Scale Service wants to determine if their business is under control of Ohm Electronics, so they need to determine the following points. Are Bob’s employees performing work under the direct supervision of Ohm’s employees? Does Ohm’s require them to wear Ohm Electronics uniforms? How is the work billed? Does the employee submit time cards to Ohm Electronics? Are Bob’s employees using or operating equipment provided by Ohm’s?

The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.

  • The work being done for Ohm Electronics, even if it is done at or for one of their customers, must be controlled by Ohm Electronics and not their customer.

The contract with the business service provider is in writing.

  • This is the easiest provision to understand, and in some cases the most difficult to enforce. All work done by Bob’s with Ohm Electronics must be in writing. Customers that want to work with Bob’s on an on demand basis will need to formalize the work in a written contract.

If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.

  • Ohm Electronics will need to ensure that Bob’s Scale Service holds all the necessary licenses and permits for the jurisdiction they are working in. This may require Bob’s to submit those items to Ohm Electronics.

The business service provider maintains a business location that is separate from the business or work location of the contracting business.

  • Bob’s Scale Service must have a different physical address than Ohm Electronics.

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

  • Bob’s Scale Service must be engaged in the type of work that Ohm Electroncs is hiring it for. For example: Bob’s would be performing calibration and maintenance on scales, and hiring them to clean the Ohm Electronics offices may cause an exception to the B2B exemption.

The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.

  • Bob’s Scale Service must actually be in the business of providing the service for which it is being engaged. To be considered a separate business Bob’s must maintain other clients.

The business service provider advertises and holds itself out to the public as available to provide the same or similar services.

  • Ohm Electronics needs to ensure that Bob’s Scale Service is a legitimate business that is offering its services to others. Marketing materials, business cards, logoed vehicles, and websites may be used to ensure compliance with this rule.

The business service provider provides its own tools, vehicles, and equipment to perform the services.

  • Bob’s Scale Service must provide the tools, and equipment necessary for providing the service for which they are being hired.

The business service provider can negotiate its own rates.

  • If Ohm Electronics sets the rate that it will accept for a service, they will have a difficult time satisfying the B2B requirement. In order to pass this requirement Ohm Electronics will need to show evidence that it has not set these service rates, but has solicited bids or offers.

Consistent with the nature of the work, the business service provider can set its own hours and location of work.

  • As written this may seem to imply that Ohm Electronics can’t set the hours that they are available. The intent of the rule however is to prevent Ohm Electronics from exercising control of Bob’s Scale Service – as noted above.

The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

  • Bob’s Scale Service can’t use this exemption if the work it is performing is covered under the CSLB. Companies that are licensed contractors have their own exemption from AB5.

This subdivision does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a contracting business.

  • Ohm Electronics should contract only with a contractors that are actual businesses. To be considered a legitimate business a company should registered with the California Secretary of State as a corporation, LLC, LLP, partnership or sole proprietorship. Contracts with individual persons will not satisfy the “business-to-business” exemption.

Now for the kicker. After meeting all of these requirements you still may not be found to be exempt from AB5. As this is a new law it has yet to be tested in the courts, and once the courts have their say it may change even further.

References: Wikipedia:,
California’s Legislative Information Page:

A Common Mistake in Sales

Having a new sales person, after never having one, is a learning experience.  Hiring someone without knowledge of the industry has its own challenges. Learning the products and services that are sold, and the combinations of both, can be a long process. 
A common process that we have, that many other industries don’t, is that we sell products marked up from the net price, and hence don’t have a true list price. To my surprise many people, whether technicians, salespeople, or administrators don’t understand how to correctly mark a product up.

There are two methods that can be used to get your list price. The Percentage Add On, and the Percentage Mark Up.  Most people use some form of Percentage Add On to create their list price, however to truly control your profitability a Percentage Mark Up should be used instead.

To show the difference between these two methods I will give several examples.

I will be using the following values to determine the selling price:
A Part  Purchased for:                     $500
The desired Profit:                           25%
Where S = Sell price, P = Purchase Price, Y = Desired Profit

S = P + (P x Y)
$625 = 500 + (500 x 25%) or 500 +125

S = P ÷ ( 1 – Y )
$666.67 = 500 ÷ (1 – 25%) or 500 ÷ 0.75

An Add On just adds a percentage to a known value and is easy to do, but it doesn’t work backwards.  Using the Percentage Add On example above I get a selling price of $625.  But what happens when I try to take 25% back out of the $625  —  $625 x 25%.  I end up with a funny number that doesn’t match my add on, $156.25.  With a Mark Up this doesn’t happen because you are actually increasing the purchase price by the selected percentage. Using the Mark Up example above I get a selling price of $666.67.  I take out the 25% —  $666.67 x 25% and get $166.67 the exact amount added to my purchase price.

As prices and percentages go up the difference between an Add On and a Mark Up increase substantially.  For example Marking Up $100 by 40% will give a sell price of $166.67 where an Add On gives $140.  Now try it with $3000:  Mark Up =  $5000   Add On = $4200.

Setting your list prices using a percentage Add On will cause problems if you ever try to discount. Examine the following chart to see the problems that can occur.


Note that the expected profit doesn’t match up in either chart.  In the Add On Chart the expected profit is always smaller than the Add On minus the % Discount, whereas in the Mark Up Chart the expected profit is always larger than the Add On minus the % Discount. The reason for the discrepancy in the profit is due to where the numbers are being taken from. A 10% discount on a 50% Mark Up is not the same as a 40% Mark Up.  The initial price is being increased by 50%, so when the 10% discount from the Marked Up price is taken, it is from the higher price, not the initial price that was Marked Up.  5% of $100 is $5, whereas 5% of $150 is $7.50.

Making money is why we are in business. Making it smart is better for us all.

Finding and Hiring the Right Person and a Plan to Keep Them.

In many small businesses the “Friends and Family Plan” is the most common hiring strategy. (Friends and Family hiring consists of bringing in people you have a relationship with, because you know them and they need a job, or have a skill you need, or you just like them. The biggest problem with this hiring technique comes when you need to fire them. Can your relationship survive?) Companies use this method until they reach a point where their friends and family can’t meet the skills or company needs, then they hire out.
My son entered to the scale industry by default. He didn’t want to be here, but had made some poor decisions with school, and voila, you’re a scale technician now. He was resentful, and didn’t want to work in the company, but needed the money. He started part time as the second man on a job when we needed unskilled labor. I tried to instruct him in the basics; it went in one ear and came out the other. When I fired one of my techs he assumed that he would be the natural replacement, since he had been working for me for so long. I had a long talk with him and explained that he would have to compete with others for the job, since he had shown so little interest. He had recently gotten engaged and was now looking at his future and had to make some hard decisions. He came to me and asked me to re-consider. He promised to buckle down and try. I decided to give him the chance. He was a changed person; he worked harder and was eager to learn. It was a night and day difference.
In the example above, my son shows what happens when you hire without a plan. When I gave him the chance to come on full time, I presented him with my plan and his path to get where and what he wanted. I hadn’t done this originally and, to my regret, wasted an opportunity to have him ready when I needed him. The blame was mine, not his.

Plans and Paths, what is the difference? For me, the plan is how I am going to find, hire and train the new technician. The path is how the technician moves forward in his skills.

Developing a plan for your employees that detail their opportunities helps keep them motivated, and motivated employees tend to be happy. Happy employees don’t quit and will put up with annoyances that are intolerable to an employee that isn’t. Reiterate the plan when you have your yearly reviews and update it as necessary asking the employee for their input. The key to retention is to have a stable workplace where the employees are happy. Surprisingly happy doesn’t always equate to more money. Sometimes it’s responsibility, other times it is stability. Get to know your employees and what makes them tick.

Finding the right person.
Hiring is a headache. With the down economy and so many people looking for a job, it seems that finding the right person for the job should be easy. The problems lie in sorting the wheat from the chaff. Put up a detailed ad describing exactly what you are looking for, and you will be inundated with people that you wouldn’t hire to wash your car, let alone represent you and your company. Hiring the wrong person can be extremely costly, in time, money and even the reputation of your company.

Hiring the right person requires its own plan. Get out a notepad and let’s break it down:

  1. Define the perfect candidate for the job. Write out the skills he will need, the specific job requirements he will fill, and the personal characteristics you desire. Use this to create a report card that you will use to grade each applicant.
  2. Define the job. Clearly outline the expectations for the position. Set the pay scale. Formalize your proposed incentive plan for the position.
  3. Pre-screen your applicants. Go through the resumes and applications (the chaff). Don’t talk to anybody without pre-screening them and seeing if they meet on paper the qualifications and skills you wrote down in #1. Only then set up the interview. The interview is where you find the wheat.
  4. Look for successful people. Find the person that has shown a desire to excel. Ask about awards they have received. Question them about how they measure success in themselves. Ask open ended questions about how they have succeeded in the past. Check their job history and references.
  5. Don’t settle for good enough. In this economy there are stars out there waiting to be hired. Take the time you need to find the right candidate and make the right hire.
  6. Look for stars elsewhere. Finding the right person sometimes means stealing him from the competition or even from another industry. In this economy it says a lot that these people are still working when others aren’t.

Be aware of what you can and can’t ask during a job interview. The following link is an excellent resource for do’s and don’ts.

After performing due diligence, and weeding through the applicants you have settled on the person you want to hire. Take the next step and make your offer.