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  • Josh Rosenthal

What To Know About AB5

There has been much concern over AB5 and how it may drastically change the “gig” economy in California. However, it may not have much of an effect on mortgage lenders. AB5 essentially codifies the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County (Lee), 4 Cal. 5th 903 (2018). That decision applied the “ABC” test to determine whether a worker is an employee or an independent contractor and shifted the burden to the employer to demonstrate why the worker should be classified as an independent contractor.


The “ABC” test is, essentially: A) Is the worker free from the control and direction of the hiring entity in the performance of work? B) Does the worker perform work that is outside the usual course of the hiring entity’s business? C) And, is the worker customarily engaged in an independently established trade, occupation, or business in the same nature as the work performed for the hiring entity? Unless an employer can answer “yes” to all of those questions, then the worker must be classified as an employee. Dynamex adjudicated whether or not delivery truck drivers could be classified as independent contractors and determined that they could not. AB5 seeks to define what types of workers and jobs are subject to which test.


Prior to the Dynamex decision, the generally accepted test was called the “Borello” test. It was similar to the IRS control test. It has many more factors than the “ABC” test and no single factor is determinative. Classification of real estate licensees was generally accepted as falling under the “Borello” test (if they met the requirements of the test), due in large part to Business & Professions Code Section 10032, which specifically states that licensed salespeople and brokers can choose to contract between themselves as independent contractors, for certain purposes.


AB5, via its amendment to the Labor Code, specifically exempts real estate licensees from the Dynamex holding. Labor Code Section 2750.3(d)(1). With regard to classification of loan originators for the other two licensing laws that regulate residential mortgage loans in California – the CRMLA and the CFL- loan originators have to be classified as W2 employees anyway. Because the same California real estate license can be used to buy and sell real estate as well as originate loans (with an MLO endorsement), loan originators may be the unintended beneficiaries of this exception to AB5.


This real estate licensee exception to AB5 does not mean that DRE licensed loan originators can automatically be treated as independent contractors regardless of the situation. But it does mean that the stricter Dynamex “ABC” test the legislature codified in AB5 does not apply to DRE licensees.


There are pending legal challenges to AB5 by Uber and Postmates, by freelance journalist and by independent truckers – just to name a few. The independent trucker action resulted in a temporary restraining order halting enforcement of AB5 as to any motor carrier operating in California. So, this issue is likely to be fluid for a while as courts sift through the various challenges to the law by different types of workers. If you have any questions about how to classify your loan originators, give us a call to discuss how to comply with the new law.

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