A Look at the 2018 California Employee-Mandated Bill
Service-based pool companies often rely on contractors. Instead of having an employee clean pools and providing them with a vehicle, tools, insurance and paying out the appropriate taxes, they hire 1099 contractors, who need to provide their own transportation and equipment and are responsible for their own taxes. When the status for contractors changes by law, it shakes everything up for both contractors and companies alike.
In California, contractors are now more likely to be considered employees under Assembly Bill 5 (AB5), passed by California legislature in 2018, which transitioned many workers to the status of employees, rather than independent contractors. The intention of AB5 is to shut down the underground economy that paid workers under the table and didn’t extend them appropriate benefits like overtime or healthcare. For a contractor, it offers better protection, but doesn’t allow them to freelance or maintain their own schedule as they might have under a contractor status. There is wiggle room, however: If a pool company is not a one-stop-shop and needs an electrician to fix wiring, the electrician could qualify as an independent contractor and wouldn’t need to be an employee.
The initial bill changed the pool industry rules enough that Ben Honadel of Pools by Ben, Inc., restructured the business he’s had since 1988. When the law changed [in 2018], Honadel closed his family-owned, full-service pool maintenance and repair business and shut down his pool route. It was unaffordable to have mostly employees instead of contractors, he says.
Now, his business model is focused on installing variable-speed pumps. So far, it’s been a good change aside from COVID and distribution hiccups, and he’s in the process of expanding his crew beyond one installer.
“I anticipate a good year this year,” he says. “Exploding demand and very few skilled installers make it a profitable market to enter.”
After an uproar from contractor-heavy businesses in 2020, lawmakers amended the law with AB2257, which added more exemptions to include pool cleaners. Under the amendment to AB5, if a pool company doesn’t have strict control over a worker’s schedule or how services are conducted, based upon three requirements (see sidebar), that worker can be deemed a contractor. Referral workers, a term not thoroughly defined by law, also don’t need to be defined as employees. Otherwise, pool cleaners are required to be hired as employees.
However, the changes from AB5 initially sent the pool industry spinning, especially for those using contractors to clean or service pools. Even with the amendment, those who used to be independent pool maintenance contractors may still need to be hired as employees, since the hiring entity will have control over work performance and the work is not outside the business’s offerings, per the checklist requirements.
John A. Norwood, head of government relations for the California Pool & Spa Association, believes the changes do have benefits, including offering more job security for pool technicians.
“Even in the pool and spa industry, California had a real problem with the underground economy,” he says of companies that often-paid service staff cash under the table. “Some people say that 70% of what’s done in the landscape business is done in the underground economy and about 50% of the pool industry is underground.”
While the intent of the bill meant to prevent companies from exploiting contractors, Honadel suspects it will negatively impact the pool world, especially for those just getting started in the industry.
“There are a lot of cons to the bill,” he says. “You start out cleaning pools. That’s how you cut your teeth. That’s how I started.”
Others look at it as a way to strengthen their businesses.
Scott Reynolds, CEO of The Get Smart Group, a full-service marketing agency for home recreation companies, home improvement contractors and general contractors, is experiencing the bill’s impact both as a business owner and through its pool industry clients.
Reynolds looks at the passage of AB5 as a good change though, even if it costs more for business owners.
“Look at it as a legislatively forced opportunity to improve your business,” he jokes. “If you’re in California, it’s just the cost of business. I’m not happy about it. It costs my clients and myself a lot more money.”
But as someone who formerly ran a business of freelancers, Reynolds viewed the new legislation as a way to do business better. At any given time, he had upwards of 20 writers from all over the country. Now, he’s managing full-time employees because of AB5. It’s not his idea of how he’d like to run his business, but it’s made him look at ways to better serve customers who now have access to his full-time staffers. Instead of contracted workers, he now has employees who are fully focused on his business and their roles.
He says the biggest impact for his pool industry clients is on the service side.
“If you have service where a lot of people like to pay their [contractors] by the pools [they service], that doesn’t work anymore,” he says. “Now you’re stuck with hourly employees.”
Both Reynolds and Honadel believe the law will force the hand of innovators in the industry and lead to better business models. The strongest and smartest businesses will survive, they say.
“The larger professional companies will…drive the small guys out,” Honadel says.
Reynolds is seeing smarter professional changes with his own clients in the pool industry. For those who had a per-pool pricing model, they’ll now have to get more efficient with business practices and tighten purse strings, he says, while also making smart hires through a referral agency.
Full-time employees can offer stability that makes a pool business run better, Reynolds says. While employees cost more, when they’re paid a living wage and treated fairly, they’re more likely to stay loyal and benefit the company longer-term than a come-and-go contractor.
“You can usually attract better people,” he says. “But you need to have a solid training and management structure in place. Never discount the power of a good solid employee, who is well paid [and] visiting 50 to 70 of your customers every month. The opportunity for building relationships and for upsells can far outweigh the costs.”
Given this law could potentially start popping up in other states, pool service companies may want to start thinking about how they might handle major contractor changes. Whether that means reworking a business model or finding quality referral agencies, both Reynolds and Honadel advise others look ahead to potential legislative changes. “Look at it as an opportunity to improve your staff,” says Reynolds. “If you’re going to have to pay more, believe it or not, you’re going to attract better people. There’s not a lot I can do about it. Why waste the time and energy getting upset about it?”
ABC TEST: What Does It Entail?
Under the law, contracted workers for pool service companies are no longer allowed, except if meeting specific standards. Workers are considered an independent contractor if they meet all three of these requirements:
The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under contract for the performance and execution of the work and in fact.
The worker performs work outside the usual course of the hiring entity’s business.
The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.