Note: Readers can now find cases, laws and articles relating to appraiser independent contractor classification in the “AB 5 Center.”
Appraisal firms and appraisal management companies utilizing independent contractor appraisers in California need to get familiar with Assembly Bill 5 (AB 5) – California’s new “gig worker” law.
As was expected, Governor Newsom signed AB 5 on September 18, and it will become effective on January 1, 2020. The law presents significant challenges and obstacles to treating appraisers as contractors in appraisal firms and AMCs. The risk of getting it wrong means becoming easy prey for a class action.
What does AB 5 do?
The primary relevance of AB 5 is that it codifies the California Supreme Court’s landmark decision in Dynamex Operations West, Inc. v. Superior Court. In that opinion, the Court held that for purposes of California’s Industrial Wage Orders, which specify overtime requirements in particular, a firm classifying a worker as an independent contractor rather than as an employee bears the burden of establishing that the classification is proper under the so-called “ABC test.” To meet this burden, the firm must establish all three of the following factors to justify treating workers as contractors:
(A) that the worker is free from the control and direction of the hiring firm in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
(B) that the worker performs work that is outside the usual course of the firm’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
This is a significantly different and tougher test than was applied under prior California precedent (under the Court’s prior’s opinion in Borello) that principally weighed a lost list of factors relating to control of the firm over the contractor.
The key challenges for appraisal firms and AMCs under AB 5 and the ABC test.
Meeting any of the three parts of the ABC test may be a challenge for many firms, but among the three factors, the hardest one that both true appraisal firms and AMCs will have to contend with is part (B) relating to whether an appraiser’s work falls outside the regular course of business of the firm or AMC. Frankly, because a true appraisal firm’s business is providing appraisals, rather than only managing the process of having appraisals performed by third party appraisers as an AMC does, it will be challenging for appraisal firms to argue successfully that the work of a contractor appraiser isn’t the usual business of the firm. Likewise, an AMC that maintains a staff appraiser operation and is what might be called a “hybrid” AMC/appraisal firm will also have a very difficult position to defend — not only if it classifies an “staff appraisers” as contractors but also in the classification of its panel appraisers. Such a hybrid probably will have try to fit its panel appraisal service providers into the “business-to-business” exception mentioned below.
Even pure AMCs, however, will face challenges in continuing to utilize appraisers in California as independent contractors. Essentially, AMCs will either need to: (i) succeed with arguing under Part B of the ABC test that the performance of appraisals by appraisers is outside the usual course of their business because “AMCs only manage the process” – as widely reported, Uber’s argument is that it is a technology platform, not a transportation company (I take a closer look at this contention in a new post here), or (ii) prevail in establishing one of the exceptions in the law. To this point, there is an exception for “real estate licensees” that might appear promising at first blush, but appraisers are not defined in the California Business and Professions Code as “real estate licensees.” The definition is limited to agents and brokers. The other potentially applicable exception is a “business-to-business” exception that may apply when one business is providing services to another business, as opposed to an individual worker providing services. This “safe harbor” (really more of a rough anchorage) will require significant work by AMCs seeking its protection. AMCs will need to rewrite their appraiser contractor agreements and modify some common practices.
Considering appraiser contractors under AB 5’s “business-to-business” exception.
Here are a few of the key items that need to be satisfied by AMCs to fit into the “business-to-business” exception:
- The AMC must contract with an actual “business” (sole-proprietor, corporation, LLC, partnership, etc.) to perform the appraisal service, rather than contracting with individual “workers” (i.e., individual appraisers).
- The appraiser business must have any business licenses or tax clearances that may be required in the jurisdiction where the appraisal work is performed.
- The AMC must be able to show that the appraiser business is providing its services directly to the AMC rather than to customers of the AMC – this might present a challenging argument because under appraisal standards the “client” of the appraiser is usually defined as a lender (when the appraisal assignment is for a loan).
- The AMC must be able to show that the appraiser business supplies all its own “tools” and “equipment” to perform the services (AMCs will need to consider whether any of their new cloud/software-based appraisal products cross this line).
Because this article is focused on appraisers, one subject that I’m leaving out of the discussion here is consideration of the ability of AMCs or vendor management companies to handle contractors who perform non-appraiser work such as “property data collection” for the new bifurcated valuation products. AB 5 may put a wrinkle in some of those new products in California. “Property data collection” currently doesn’t lend itself to being viewed as an established type of trade, occupation or business that the service providers/workers would be offering generally. Accordingly, classifying these workers as independent contractors could be challenging for the reasons discussed above and also under part (C) of the A-B-C test, which requires that the firm engaging them show that they are “customarily engaged in an independently established trade, occupation, or business.”
How AB 5 creates more risk for appraisal firms and AMCs than the Dynamex decision (under which the ABC test already has existed for more than a year).
AB 5 creates more risk for firms and AMCs because it expands application of the ABC test beyond what are called the Industrial Wage Orders – the main practical effect of the Dynamex decision was that reclassified workers would be entitled to overtime under the Wage Orders. Under AB 5, the ABC test will now apply for all purposes under the California Labor Code and also for purposes of unemployment insurance. This means that a reclassified worker would be entitled potentially to recover the reimbursement of costs and expenses that is required for employees under Labor Code section 2802. This a real risk for AMCs and provides attractive bait for attorneys to file putative class actions when a disgruntled appraiser is willing to serve as a named plaintiff. The reason is that, while a reclassified appraiser performing occasional assignments for a single AMC probably wouldn’t have worked material overtime hours for that AMC, the appraiser would certainly be able to show recoverable employee expenses for such items as gas, mileage, insurance, MLS fees, etc.
The most likely ways that reclassification claims will occur by appraisers under AB 5.
It should be noted that most appraisers who work for AMCs probably don’t want to be employees of the AMCs from which they receive assignments. There are real economic advantages to appraisers in maintaining themselves as independent business owners – namely, favorable tax deductions. Accordingly, I think a majority of appraisers and AMCs will likely be on the same side in wanting to continue contractor status. All is fine when both parties stay happy. The legal claims about misclassification will come predictably when appraisers feel unfairly treated by an AMC, when appraisers lose an AMC’s business, or when appraisers fall into economic difficulty. An appraiser sued for professional liability might also contend in a severe case that he or she is actually an employee of an AMC in effort to establish a duty by the AMC to indemnify the appraiser as an employer.
Because of the high stakes, appraisal firms and AMCs with contractor appraisers in California need to start working on plans to deal with the new law and its risks. This is a subject that I addressed to firms and AMCs last week at the Appraisal Summit in Las Vegas, and that I will be addressing in more detail for both appraisers and AMCs at the upcoming Valuation Expo.
For appraisal firms, the subjects of appraiser independent contractor classification and treatment of employee appraisers as exempt from overtime are covered in chapters 25 and 26 in my book Risk Management for Real Estate Appraisers and Appraisal Firms.
– Peter Christensen, email@example.com