Signed by Governor Newsom on September 18, AB-5 will become effective on January 1, 2020. It presents significant challenges and obstacles to treating California appraisers as contractors in any appraisal firm or AMC. To firms and AMCs, the risk of handling appraiser classification wrong under the law means becoming potential prey for class actions. For appraisers currently working as contractors, in some cases, it may result in diminishing their independence and the tax benefits associated with self-employment.
Let’s look at key details of the law, as it applies to appraisers.
What does AB-5 do? 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 in particular set forth overtime pay requirements for non-exempt employees, 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 “A-B-C test.” To meet this burden, the firm must establish all three of the following factors to justify treating workers as contractors (I’ve repalced the word “worker” with “appraiser” in this passage):
(A) that the [appraiser] 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 [appraiser] performs work that is outside the usual course of the firm’s business; and
(C) that the [appraiser] is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
This is a significantly tougher test than was applied under prior California law. Meeting any of the three parts of the test might be a challenge for many firms, but among the three factors, the hardest one that both true appraisal firms and AMCs must contend with is part (B) relating to whether an appraiser’s work falls outside the usual course of business of the firm or AMC.
Frankly, because a true appraisal firm’s business is providing appraisals, it may be implausible for such a firm to argue successfully that the work of a contractor appraiser regularly performing assignments for the firm isn’t in the usual course of business of the firm. Likewise, an AMC that maintains a staff appraiser operation and is what might be called a “hybrid” AMC/appraisal firm would also be very challenged to support that position (and will need to try to fit within the exception to the law discussed below).
Even pure AMCs, however, will face challenges in continuing to utilize California appraisers as independent contractors. Essentially, AMCs will either need to: (i) succeed with arguing that the performance of appraisals by appraisers is outside the usual course of their business because “AMCs only manage the process” (this is similar to Uber’s argument that it is not a transportation company and is instead a provider of technology to drivers), or (ii) prevail in establishing one of the exceptions to the law. On this point, there is an exception for “real estate licensees” in the statute 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” (which I view really more as a rough anchorage) will require significant work by AMCs seeking its protection. AMCs will need to rewrite their appraiser contractor agreements, revise their lender service agreements and likely modify some of their existing practices.
Here are a few 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 and pay taxes 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 may 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 other service providers or vendor management companies to handle contractors who perform 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.
How does AB-5 create more risk for appraisal firms and AMCs than the Dynamex decision (under which the A-B-C test already has existed for more than a year)?
AB-5 expands application of the A-B-C 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 A-B-C 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 provides attractive bait for attorneys to file putative class actions when an 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 one AMC, the appraiser would likely be able to show recoverable employee expenses for such items as gas, mileage, insurance, MLS fees, etc.
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. And, 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.
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. And, appraisers in California will likely be seeing some new forms to sign and likely some changes in the mechanics of receiving orders.
|A Preliminary Look at AB-5 from the Operational Side of an AMC by Kim Perotti, Co-President of AXIS Appraisal Management Solutions.|
AMCs and lenders, and appraisers too, will face operational impacts from AB-5. We may see the following adjustments from those seeking to comply with AB-5 and potentially seeking to assure that the appraisal firms they contract with fit within the current “business-to-business” exception in the law:
Some AMCs may consider making individual appraisers actual employees. This kind of employment relationship may not have the “feel” of regular employment in that it will be sporadic work as assignments come up – but the bottom line will be that an appraiser is issued a W-2 for tax reporting, rather than a 1099, and with regular required withholdings for employees. This option, of course requires compliance with other employment laws which could add additional costs.
This is a subject that I look forward to addressing in more detail with Kim Perotti of AXIS Appraisal Management Solutions at the upcoming Collateral Risk Network meeting and at Valuation Expo.
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