Appraisers as Independent Contractors for AMCs: Looking More Closely at AB 5

I’ve had many questions from appraisers, appraisal management companies (AMCs) and attorneys about independent contractor classification of appraisers under AB 5, California’s new “gig worker law,” and in relation to my earlier article on the subject.

Is the work of independent contractor appraisers outside the “usual course of business” of an AMC?

Most of the detailed questions rightly get at Part B of the ABC test: is the work of an independent contractor appraiser on an AMC’s panel outside the “usual course of business” of an AMC? I’m focusing here in this post on “pure” AMCs — that is, AMCs that do not have staff operations of employee appraisers performing appraisals for clients.

Before I get into the details of the question, here’s a brief recap of the ABC test adopted by the California Supreme Court in its Dynamex decision and given wider application in California by the passage of AB 5. If a pure AMC wishes to continue utilizing California appraisers as independent contractors on its appraiser panel without risking adverse labor problems (both with the state and in potential actions by appraisers for reclassification), the AMC has the burden of satisfying all three parts of the ABC test:

(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. 

Parts A and C should not be a problem for most AMCs, though all AMCs would be wise to review their contractor agreements and practices. It’s Part B that’s the real challenge.

Part B of the ABC test is the key issue for AMCs.

To meet their burden under Part B, AMCs need to establish that the appraisal services by their contractor appraisers are not services performed “within the usual course” of the AMC’s business. If an AMC cannot meet this burden (and also satisfy the other two easier parts of the test), then its contractor appraisers may be reclassified as employees and be entitled to regular employees’ rights and benefits (such as overtime, break time, etc.) — unless the AMC can show that a specific exception in AB 5 applies. In addition, in the context of appraisers potentially being reclassified as employees, a particular concern is the AMC’s responsibilities to its reclassified appraisers under California Labor Code section 2802. This code section makes an employer financially responsible to its employees for reimbursement of expenses and losses in incurred by the employees in the course of their employment. For appraisers, this could mean items like MLS costs, software, E&O insurance, car expenses/mileage, and even indemnification for liabilities incurred in connection with the appraisal work for the AMC.

The Dynamex opinion provides a simple example for understanding how Part B works:

When a retail store hires an outside plumber to repair a leak in a bathroom on the premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee. On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company, or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees.

For a pure AMC, an appraiser panelist falls somewhere in the middle of that example, and it’s an issue that will likely be fought over in any legal action. The determination of the test is also employer-by-employer and is not made categorically for a certain type of work or business. So, it really depends on an AMC’s individual business practices, contracts, agreements, website, marketing, etc.

There’s risk to AMCs with the contention that appraiser-provided services are not within their usual course of business.

As they begin approaching the issues raised by AB 5, a few pure AMCs seem to be opting for the easy button argument, which is basically: “We’re OK under Part B because we don’t perform or sell appraisals; we only manage the process. So, what the contractor appraiser does is not in the usual course of our business.” This is similar to Uber’s widely reported contention that it’s a technology platform, not a transportation company. The problem for AMCs is that their position may fall apart (and it’s an AMC’s burden to win it) unless they begin making some changes in their agreements, on websites and in certain practices common to many AMCs.

Even courts disagree on the meaning of “usual course of business.”  Some courts look at how the business describes itself — that could be a real problem for unprepared AMCs. I see many present AMC websites that say something like this: “we offer appraisals and valuation products and services to our clients” and then the AMCs typically have a price-sheet for their clients to order each type of appraisal service or product. Some courts could logically read a description like that and see the offering of the products/services for sale as the AMC being in the business of selling appraisals — and thus, selling appraisals produced by third parties who should be treated as employees, not contractors. Other courts think that “usual course” gets at whether the service is a frequent or major part of the overall business conducted by the company — AMCs could have a problem with that interpretation too.

I’m not saying that pure AMCs will lose the argument. I think their business model lends itself to legitimate use of contractors even under AB 5 and the ABC test, but they do have to make some adjustments if they want to increase their chances of success. AMCs need to make adjustments in their appraiser agreements, possibly in lender agreements, on their websites, in the descriptions of their services and in some practices. And, they also need to take a look at whether they want to try to satisfy the requirements for the “business-to-business” exception in AB 5, which is the only exception that currently has any real application to AMCs, but it would require more significant operational changes for most AMCs in the way they retain “appraisal firms.” 

AMCs should not wait until AB 5’s effective date on January 1 – the ABC test already applies.

Some AMCs are also under a misperception that they don’t need to do anything until January 1, 2020 when AB 5 itself becomes effective. That’s not the case – Dynamex and the ABC test instilled by it are already law in California. AB 5 just creates wider application of the test to things like an employer’s reimbursement of expenses that I mentioned above (under California Labor Code section 2802).

Having said all of the above and outlined the main legal challenges ahead for AMCs in California, it should be recognized that most appraisers who work for AMCs probably don’t want to be the employees of those AMCs. There are real economic advantages to appraisers in maintaining themselves as independent business owners – namely, favorable tax deductions. And, all is fine with that arrangement when both parties remain happy – all is fine until someone is not happy or runs into difficulty. The legal claims against AMCs about misclassification will come when individual appraisers feel unfairly treated by an AMC, when an appraiser loses an AMC’s business, or when an appraiser falls into economic difficulty. At that point, the individual appraiser may go see an attorney — and if it’s the right attorney, an individual or class action for reclassification may then occur. Many AMCs and firms have been through overtime litigation with their staff appraisers — most of those cases started too with a single disgruntled plaintiff.  

I will be speaking in detail about these matters to AMCs and appraisers in presentations during Valuation Expo, September 29-October 2, in Las Vegas. Please feel free to talk with me there. Or, if I can help you with legal advice on these issues, please reach out to me.

– Peter Christensen, [email protected]