New Law (A.B. 2257) Paves the Way for New Independent Contractor Status

Posted: September 10, 2020 |

Since A.B. 5 took effect on January 1, 2020, businesses and workers (including employment law practitioners) across this state have struggled to understand and apply its criteria when determining whether a worker is subject to the rigid ABC Test or the more flexible multifactorial Borello test for purposes of classifying a worker as an employee or an independent contractor. For a recap of the ABC Test, please refer to our prior blog.

Although A.B. 5 codified the California Supreme Court’s three-pronged worker classification test referred to as the ABC Test, it also extended its reach beyond the Industrial Welfare Commission’s Wage Orders and included numerous exemptions from the ABC Test. The appropriateness of a worker’s independent contractor status for occupations exempted from the ABC Test are evaluated under the more relaxed Borello Test standard, which uses a multi-factor analysis focused largely on the right to control the worker. Some of the A.B. 5 exemptions were industry specific while others were more general in scope. 

Rather than attempt to pigeonhole their workers into non-industry specific existing exemptions, a number of industries have spent considerable effort lobbying state legislators to expressly exempt occupations within their industries from the ABC Test. For some industries, their lobbying efforts have paid off. 

On September 4, 2020, Governor Newsom signed into law A.B. 2257 (commencing with Labor Code section 2775 et seq.), which took effect immediately upon its passage and modified portions of A.B. 5. Given the complexities associated with interpreting A.B. 5 and the new A.B. 2257 amendments, this blog will provide only a general overview of some key highlights to the new portions of A.B. 5. 

As an initial matter, A.B. 5 sets forth a maze of initial criteria that must be met before the Borello Test factors apply to certain occupations or business relationships, which has caused a great deal of confusion for businesses attempting to determine which test applies to their various worker relationships. A.B. 2257 attempts to clear up some of that confusion. 

With respect to the business-to-business exemption from the ABC Test, A.B. 2257 revised and recast certain exemption criteria. For example, A.B. 5 included, among other requirements, the requirement that the business service provider “actually contracts” with other businesses to provide the same or similar services to qualify for the exemption. A.B. 2257 removed reference to “actually contracts” and replaced it with “can contract with other businesses.” In other words, businesses can qualify for the exemption if they do not have actual contracts with other businesses as long as they have the opportunity to contract, as specified. A.B. 2257 also qualifies an existing provision in A.B. 5 requiring the business service provider to provide services directly to the contracting business rather than to customers of the contracting business. The new law clarifies that this section 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.” The new law also makes clear that the business-to-business exemption extends to business relationships between sole proprietors. Additionally, A.B. 2257 creates an exemption from the ABC Test for individuals acting as a sole proprietor or separate business entity formed as a partnership, limited liability company, limited liability partnership, or corporation who contract with one 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.” In some instances, new requirements were added. For example, A.B. 2257 added the requirement that business service provider contracts must include “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.”

A.B. 2257 further revises the criteria pursuant to which referral agencies and service providers providing services to clients through referral agencies are exempt and revised applicable definitions.

Subject to certain criteria, A.B. 2257 also added to the list of occupations potentially exempted from the ABC Test, including but not limited to:

•     Persons who provide underwriting inspections and other services for the insurance industry such as, premium audits, risk management or loss-control work;

•     Manufactured housing salespersons, subject to certain obligations;

•     Persons engaged by an international exchange visitor program, as specified, consulting services, animal services, and competition judges with specialized skills;

•     Licensed landscape architects, specialized performers teaching master classes, registered professional foresters, real estate appraisers and home inspectors, and feedback aggregators;

•     Freelance translators;

•     The referral agency exception was expanded to include, but is not limited to, consulting, youth sports coaching, caddying, wedding planning, services provided by wedding and event vendors and interpreting and interpreting services by a service provider certified by one of several specified agencies;

•     Recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians engaged in creating sound recordings, vocalists, photographers working on album covers, and other press and publicity photos relating to recordings, independent radio promoters and types of publicists;

•     Musicians or musical groups for the purpose of a single-engagement live performance event (unless certain conditions are met);

•     An individual performance artist; and

•     Digital content aggregators who serve as licensing intermediaries for digital content.

The submission caps previously set out in A.B. 5 for certain occupations to qualify for the Borello Test such as still photographers and freelance writers were removed, and new contract requirements were added for those occupations in addition to others in these fields.

A.B. 2257 also listed certain occupations that are not exempt from the ABC Test, including high hazard industry services, janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction services other than minor home repair.

It is important to keep in mind that these amendments do not mean that newly identified occupations exempted from the ABC Test make those workers independent contractors. Businesses must still meet any initial exemption criteria set out in A.B. 2257 and perform a Borello analysis before determining a worker’s classification. 

A.B. 2257 amendments to the Labor Code provide that insofar as the application of the new sections would relieve an employer from liability, those sections shall apply retroactively to existing claims and actions to the maximum extent permitted by law.

The amendments to A.B. 5 are detailed and complex. Consequently, this overview does not address all of the nuances and changes set forth in A.B. 2257. For further information regarding compliance with A.B. 2257, the employment attorneys at Ferruzzo & Ferruzzo, LLP are available to provide guidance.

This blog is not meant to provide specific legal advice. For advice specific to your business, please contact any of the employment attorneys in our Employment Practices Group who are ready to assist you.

Alison C. Gibbs

Alison C. Gibbs, Esq. is a Senior Associate of the firm's Employment Practice Group.  Alison represents employers in a wide-range of employment-related litigation, including wage and hour defense, and defense of discrimination, harassment and retaliation claims.  Alison also regularly advises employers before litigation ever occurs, handling employment disputes and managing day-to-day employee issues, including reviewing employee handbooks policies, wage and hour compliance, leave issues, internal investigations, lay-offs, disciplinary action, terminations, severance negotiations, and other employment practices