California labor bill takes effect amid controversy

Home Inside FCNews California labor bill takes effect amid controversy

January 20/27, 2020: Volume 35, Issue 15

By Megan Salzano

On Jan. 1, 2020, California Assembly Bill 5 (AB5) officially went into effect, and at the same time ignited myriad questions and uncertainty among independent flooring retailers in the state who are unsure of the law’s potential to impact their businesses. Put simply, the new law seemingly forces businesses to hire some independent contractors as employees—with all the salary, benefit and tax implications that follow—with few exceptions.

Specialty flooring dealers agree, winning the battle against the big boxes rests firmly on their ability to offer unmatched service, and the new bill seems to threaten that. In addition, the costs associated with onboarding full-time employees—especially those not needed on a daily basis—could be crippling to smaller stores while also leading to higher prices for the consumer.

“This could be catastrophic,” Patrick McDonald, Legacy Flooring America, San Marcos, Calif., told FCNews. “I’m concerned that it attacks our ability to serve the customer. It hurts the quality that we can provide as an industry, and it will escalate the installer crisis big time.”

Admittedly, many flooring dealers are unclear how to interpret the new law. Jeff King, outside legal counsel for the World Floor Covering Association (WFCA), told FCNews that interpretation of this new law will, in fact, be key.

He also argued that AB5 should not warrant a retail uproar since measures can be taken to avoid penalty. “The reality is this is a harder standard, and you’re dealing with the state of California, which is pro-employee,” he said. “But California has certainly not outlawed independent contractors. You do need to re-evaluate everything you’re doing because the test is more stringent, but you can satisfy this agreement under your current model. Your biggest risk is that you’re going to be under greater scrutiny. It makes it a little less comfortable and you have to be a little more cautious, but this is not the end.”

What is AB5?
The ambitious legislation was reportedly developed as a way to curb the unfair treatment of “gig workers” mostly used by companies such as Uber, Lyft and DoorDash. However, it potentially changes the game for dozens of other industries as well—including flooring.

Put (not so) simply, the state adopted the “ABC test” for determining whether a worker is an employee or independent contractor for purposes of applying California’s wage, labor and unemployment insurance code orders. The ABC test is said to be more rigid and inclusive than the older common law classification test, which King acknowledged.

The way the test works, a worker is classified as an employee unless the employer can establish all three of the following:

  1. The worker is free from the hiring entity’s control and direction in connection with performance of the work, both under the contract for the performance of the work and in actually performing the work;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

“All three of these factors have always been considered in California—and Washington, Illinois and now New Jersey,” King noted. “However, it’s generally been on a sliding scale. For example, the less control you had [“A”], the less concerned they were about the other factors. Now, the factors are independent of one another. You can meet one criterion and still be caught—that’s the main difference.”

AB5’s impact
Flooring dealers agree, being able to meet all three factors on the ABC test—B & C, specifically—has the potential to impact several aspects of the industry. First, the already turbulent installation crisis. However, the issue doesn’t only arise due to rising costs for the employer. “If you have an independent installer in his 60s and you say, ‘You have to be my employee now, and I’ll tell you when and where you need to be,’ he’s not going to do it anymore,” said Janice Clifton, Abbey Carpets Unlimited, Napa, Calif. “A lot of them want to choose how to spend their time, and you’re going to lose some of them. We’re already impacted by lack of installers.”

Legacy Flooring America’s McDonald noted his difficulty finding a solution to part C, which dictates an independent contractor work for another already established business. “I’ve talked to my accountant, and the only thing we can come up with is to have my installers and my licensed contractors band together and form a separate corporation. I think other retailers will just throw in the towel.”

Jimmy Poulos, owner, Flooring 101, Oxnard, Calif., noted concerns with section C as well. “It hurts the single mom or those who want to work part time. I have a designer who serv- ices my accounts, and we would pay with a 1099. I can’t do that anymore. If she wants to work for me, she has to apply to be her own business. The labor for compliance is going to get a little more expensive for the consumer. It’s very, very confusing.”

However, Poulos added that perhaps it isn’t time to throw in the towel. “The law for us is 12 days old,” he said. “I’d like to do anything possible to support my industry and my employees. We’re going to adopt the reality and see what happens.”

King agreed with that sentiment, and noted that independent flooring retailers can take steps to manage each of the factors in the test to successfully navigate the new law. (See King’s column on page 74 for details.)

What happens now?
Problems arising from the new law are blaring, but steps are being taken to more clearly define its goals and the impact it might have on California’s businesses. To that point, several industries have already been exempted from the law and more are expected to be added. In fact, after its initial signing in September 2018, the California Chamber of Commerce released the following statement: “The business community will be aggressively pursuing further exemptions [in 2020]. The test set forth…does not correctly contemplate the realities of the modern economy nor fairly con- sider the sweeping impracticalities it would bring to the California economy.”

According to King, the WFCA will host educational sessions on the show floor at TISE 2020, held in Las Vegas Jan. 28-30, to help clarify the new law for any retailers in need of answers.

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