California Governor approved modifications to Assembly Bill 5 (“AB 5”), California’s worker misclassification law, to allow more individuals to be classified as independent contractors. This distinction is important because employees are provided wage and hour, workplace safety, and other workplace protections that independent contractors generally are not. The new legislation, Assembly Bill 2257 (“AB 2257”), creates a carveout for certain professionals, making it easier for them to be classified as independent contractors rather than employees. However, most industries will still be subject to the requirements of AB 5.

California’s worker classification law, AB 5, took effect on January 1, 2020. AB 5 codified the ABC Test adopted by the California Supreme Court in its 2018 decision in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903, and expanded it to cover more industries.

Under the ABC Test, a worker is presumed to be an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
  • The worker performs work that is 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 that involved in the work performed.

AB 5 expanded the reach of Dynamex by making the ABC Test the default test for all Labor Code, Unemployment Insurance Code, and Wage Order claims. When the ABC Test does not apply, the Legislature left in place the California Supreme Court’s test announced in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, under which it is generally an easier task to establish that a particular individual is correctly classified as an independent contractor.

Thus, virtually all independent contractor relationships under state employment law are evaluated either under the old “Borello” test, or the “ABC Test”. Under AB 5 (and now its replacement, AB 2257), the default is the ABC Test, which is very hard to satisfy. The ABC Test is rigorous to meet in part because unless each element (A, B, and C) is proven by the employer, the worker will be deemed to be an employee and not an independent contractor. Under Borello, on the other hand, the decision is made based on the “totality of the circumstances” and takes into account a multi-factor analysis- no single factor controls the determination but rather requires consideration of all potentially relevant factors.

The scope of AB 2257 remains the same as it did in AB 5. That is, the ABC Test and definitions formerly contained in Labor Code 2750.3(a) are now going to be contained in Labor Code section 2775.

AB 2257 contains new exceptions and modifies some of the old ones.  Here is a summary of the main changes.

Business-To-Business

Under AB 5, the “business to business” contract was analyzed under the ABC Test if the vendor’s employees were directly working with customers of the other company. Under AB 2257, this is modified to say:

The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. This subparagraph does not apply if the business service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.

This modification will allow some business-to-business contracts to avoid the ABC Test, even though the vendor provides workers to the other business who may interact directly with the contracting business’s customers.

Further, under AB 5, the contract had to be in writing. Under AB 2257, the contract must specify “the payment amount, including any applicable rate of pay, for services to be performed, as well as the due date of payment for such services.”

Under AB 5, the business service provider had to have a separate business location. AB 2257 added the “business service provider’s residence” as an appropriate business location, which makes it easier for small businesses and individual sole proprietorships to contract with other businesses while avoiding the ABC Test.

AB 2257 also adds that the service provider’s use of the hiring entity’s “necessary proprietary materials” does not invalidate the independent contractor relationship.

“Single-Engagement” Business-To-Business Exemption

AB 2257 creates an exemption from the ABC Test for individual businesspersons who contract with one another “for purposes of providing services at the location of a single-engagement event.” Provided certain criteria are met (including a lack of control over the work, a written contract specifying payment amounts, and each individual’s maintenance of his or her own business location), the ABC Test will not apply where one individual contracts with another to perform services at “a stand-alone non-recurring event in a single location, or a series of events in the same location no more than once a week.” (See Labor Code section 2779.) For example, a caterer might hire a DJ at a wedding, each of whom has a separate business.

Referral Agencies

AB 2257 also includes clarifications of the referral agency exemption, which may exempt from the ABC Test the relationship between an individual operating as a sole proprietor or a business entity and a business that refers that individual’s services to clients. AB 2257 revises the criteria governing which referral agencies and service providers are exempt and clarifies applicable definitions. The bill also expands the types of services that can utilize the referral agency exception to include consulting, youth sports coaching, caddying, wedding planning, services provided by wedding and event vendors, and interpreting services by a service provider that has been certified by one of several specified agencies.  The bill uses the phrase “including but not limited to” to determine coverage, which broadens the scope of this exception to also include those that are not expressly itemized.  On the other hand, AB 2257 lists a handful of services that expressly do not qualify for the “referral agencies” exception, including high-hazard industry services, janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, and in-home care services, as well as construction services other than minor home repair. (See Labor Code Section 2777.)

Professional Services

AB 5 contained a section exempting from the ABC Test a number of “professional services” relationships.  AB 2257 amended this provision and codified it in section 2778. The factors that the “hiring entity” must establish for the Borello test to apply are identical in AB 5 and AB 2257.  However, the definition of “professional services” is substantially changed to include more “professionals.” (See Labor Code Section 2778.)

Of note, the modification made to the professional services exception also eliminated the per-year cap on submission of work by freelance writers and photographers. AB 5 provided that if a freelance photographer, photojournalist, or writer made more than 35 submissions to the same publisher in a year, they could not qualify under the professional services exception. AB 2257 has eliminated the 35 submissions-per-year cap and added language that requires the following to be shown: that the individual providing the services is not directly replacing an employee who performed the same work at the same volume for the hiring entity; that the individual does not primarily perform the work at the hiring entity’s business location; and that the individual is not restricted from working for more than one hiring entity.

Licensed Professionals and Certain Other Occupations

AB 5’s section 2750.3(b) exempted a number of licensed and other occupations, including licensees like lawyers and doctors, securities broker sealers, and certain commercial fishermen, etc. AB 2257 modifies and expands the list in section 2783.

Music and Recording Industry

AB 2257 creates several exemptions for the entertainment industry, primarily in the music industry. The Legislature added Labor Code section 2780 to exempt sound recording and other music industry workers from the ABC Test and impose other requirements on them.

Specified Occupations

AB 2257 modified the specified occupations exception from AB 5 (now codified in Labor Code section 2783) to both clarify the exception and add additional occupations. Below are the main changes:

  • In addition to individuals and organizations licensed by the California Department of Insurance, the exception also covers “a person who provides underwriting inspections, premium audits, risk management, or loss control work for the insurance and financial service industries.”
  • The following occupations were added to the exception:
    • Landscape architects.
    • Manufactured housing salesperson, subject to the Health and Safety Code and applicable regulations.
    • A newspaper distributor working under contract with a newspaper publisher and a newspaper carrier working under contract either with a newspaper publisher or newspaper distributor. [Note: This subdivision shall become inoperative on January 1, 2021, unless extended by Legislature.]
    • An individual who is engaged by an international exchange visitor program that has obtained and maintains full official designation by the United States Department of State.
    • A competition judge with a specialized skill set or expertise providing services that require the exercise of discretion and independent judgment to an organization for the purposes of determining the outcome or enforcing the rules of a competition. This includes, but is not limited to, an amateur umpire or referee.

Retroactivity

For any employer affected by these changes, section 2785(b) says: Insofar as the application of Sections 2776 to Section 2784 would relieve an employer from liability, those sections shall apply retroactively to existing claims and actions to the maximum extent permitted by law.

Enforcement

Finally, AB 2257 modified the enforcement provision of AB 5 to provide that, in addition to the State Attorney General and city attorneys, local district attorneys can also prosecute misclassification cases against putative employers. (Labor Code section 2786.)

Conclusion

AB 2257 took effect immediately upon Governor Newsom’s signature, and is now the law of the State of California. If your business was impacted by the original requirements in AB 5 and/or the changes contained in AB 2257, we recommend consulting with NavBat to evaluate classifications of workers to ensure compliance with California law.