Running the Business · Part 6
Hiring under AB 5: the ABC test, why a 1099 helper is a lawsuit unless they hold their own license, and the construction subcontract exemption
For a plumbing contractor, the question "employee or independent contractor" has a shorter answer than for most businesses, because two statutes stack: the ABC test in Labor Code 2775 presumes everyone who works for you is an employee unless they run a genuinely separate business doing something other than your business, and Labor Code 2750.5 says nobody doing plumbing work can be an independent contractor without their own contractor's license. The only lawful "1099" on a plumbing job is another licensed contractor under a written subcontract that meets Labor Code 2781's list. This lesson is the two tests, the exemption's conditions, the penalties for getting it wrong (which are per violation and per worker), and the hiring decision that follows.
What the full lesson covers
- The ABC test (Labor Code 2775): a worker is your employee unless you prove all three: free from your control, doing work outside your usual business, and customarily engaged in an independent business of that kind. A plumber's helper fails B on its face: plumbing is your usual business.
- Labor Code 2750.5 closes the door regardless: without a contractor's license, a person doing licensed work cannot be an independent contractor.
- The lawful exception is a licensed subcontractor under Labor Code 2781: a written subcontract; a CSLB license covering the work; the business license; a separate business location; authority to hire and fire; financial responsibility by insurance, indemnity, bond, or warranty; and an independently established business of the same nature. Then the Borello factors apply, not ABC.
- Willful misclassification carries civil penalties of $5,000 to $15,000 per violation and $10,000 to $25,000 for a pattern (Labor Code 226.8), on top of the wages, overtime, payroll taxes, and the workers' compensation claim.
- The decision: hire the helper as an employee (lesson 1.8), or subcontract to a licensed plumber under a written subcontract that checks every 2781 box. There is no third option.
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More lessons in Growing the Business
- 1Hiring under AB 5: the ABC test, why a 1099 helper is a lawsuit unless they hold their own license, and the construction subcontract exemptionYou are here
- 2Employees: wage and hour, overtime, meal and rest periods, final-pay rules, and the workers' compensation class code
- 3Apprentices and the Division of Apprenticeship Standards: how a small shop trains its next plumber lawfully
- 4Adding classifications: when to add the B, the C-20, or a second specialty, and how the exam waiver works
- 5Systems: field-service software, the price book, and dispatch. What to buy, when, and what it must produce
- 6KPIs: average ticket, close rate, gross margin, and the three numbers that predict failure
- 7Supply-house credit at scale, the fleet, and inventory: the second truck's paperwork and the parts on it
- 8Becoming an RMO for someone else's company: the liability you are taking on, and the only version that is lawful
- 9Selling or stepping back: what a plumbing business is worth, what a buyer is actually buying, and what the license will and will not let you transfer
- 10Template: the hiring checklist (AB 5-safe), from the decision to the first day
- 11Template: the new-hire packet index
- 12Template: the monthly KPI sheet