Do you own an accounting or bookkeeping firm? Do you employ California residents as subcontractors to provide accounting services to your clients?

There’s a new law in California that could affect how your firm does business — even if you’re located in a different state.

The new law is Assembly Bill 5, which took effect January 1, 2020. You may have heard of it. This is the the anti-gig economy bill tightening up the rules about which workers may be classified as independent contractors versus employees. It was designed to target app-based platforms such as Uber and Lyft, which employ armies of contractors, but has major implications for many other industries in California and beyond.

The good news, which has been widely reported in the media, is that accountants have been granted an exemption from AB 5 (along with many other professions). But what many publications fail to mention is that the exemption only applies to accountants in practice holding an active license from the State of California.

Per the text of AB 5, the exemption applies to

an individual who holds an active license from the State of California and is practicing one of the following recognized professions: lawyer, architect, engineer, private investigator, or accountant.

This means that those without an active in-state license are subject to the “ABC test.”

The ABC test puts the burden on the employer to prove that a worker should not be classified as an employee. To be considered an independent contractor, a worker must satisfy all three of the following criteria:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The sticking point for many accounting and bookkeeping firms is going to be point B. A non-licensed accountant working for an accounting firm would fail that criterion because accounting is part of the usual course of the firm’s business.

So what does this mean for accounting firms?

It means that if you’re paying non-licensed California accountants as independent contractors, you’re probably going to have to rehire them as employees — regardless of whether or not your firm is located in California.

The same goes for CPAs with inactive licenses, or CPAs with out-of-state licenses. And of course bookkeepers get no exemption.

Let’s hope that this new legislation doesn’t cause firms to suddenly stop working with freelance accountants — many of us enjoy our independent status. And if you’re thinking about going for your CPA license, this may be another reason to get it.