Businesses operating in California had to change the way they classified their workers at the start of 2020, which saw Assembly Bill 5 (AB5), a new independent contractor law, take effect. Now, a full eight months after AB5 has governed independent contractor relationships in California, businesses must once again adapt to another drastic shift with the passage of Assembly Bill 2257. AB2257, which went into effect immediately on September 4th, 2020 upon receiving California Governor Gavin Newsom’s signature, adds new industries that are eligible for an exemption from the “ABC” test as well as minor changes to AB5.
AB5: What You Need to Know
Assembly Bill 5 is a state law based on the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc. v. Superior Court. Effective since January 1, 2020, it installs the “ABC” test as the default standard to determine whether independent contractors should be treated as employees of a hiring entity. The test states that for the hiring entity to classify a worker as an independent contractor, it must demonstrate that all the following conditions are satisfied:
- The person is free from the control and direction of the hiring entity in the performance of the work.
- The person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
AB5 also sets forth a complicated list of industries and occupations exempt from the law, among which includes attorneys and certain salespeople. Provided certain criteria are met, the employment status of independent contractors working in an occupation covered by one of the exemptions will be determined by the common law test for employment, known as the “Borello” test.
However, the exemptions listed out in AB5 have caused some controversy and confusion, leading many businesses and workers to ask for further clarification. In response, as of February of this year, the Legislature introduced 34 stand-alone bills exempting certain industries, which, for the most part, have been distilled into the new AB2257.
What is AB2257?
Under Assembly Bill 2257, the “ABC” test remains the default standard for independent contractor-employee classification. But while AB2257 maintains the essential framework of AB5, it brings forth a number of new statutory exemptions from the “ABC” test, which apply retroactively where applicable, as well as changes to existing exemptions. The passage of this new law follows intense lobbying and public relations campaigns from many companies within the now exempt industries. Here are the main changes enacted through AB2257:
AB2257 maintains the exemption for “bona fide business-to-business contracting relationships” where a contractor must act “as a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership or corporation contracts to provide services to another such business.” But, the exemption now also applies where a “public agency or quasi-public corporation” has retained a contractor.
Under this exemption, a worker must still fulfill the 12 specific requirements under this exemption, all of which must be met, no matter how marginal some may be. Therefore, many business-to-business independent contractor relationships may still be unable to take advantage of this exemption merely because they cannot satisfy only one of the requirements.
“Single-Engagement” Business-To-Business Exemption
AB2257 creates an exemption 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, 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.”
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Referral Agency Exemption
AB2257 also includes clarifications regarding the referral agency exemption, where businesses that refer an individual’s services to clients in the specific industries may be exempt from the “ABC” test.
First, AB2257 expands the referral agency exemption significantly with additional services that will now be governed by the “Borello” test, including consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors, and interpreting services. This expansion was one of the most significant changes in AB2257.
At the same time, however, AB2257 specifically states that the referral agency exemption is not available to independent contractors providing services in:
- “industries designated by [two designated state agencies] as a high hazard industry”; and
- ten other industries: janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction services other than minor home repair.
Second, the 10 specific requirements that referral agencies had to meet to qualify for the exemption has now been updated to 11 conditions. We foresee that only a few referral agencies will likely be able to satisfy all of the requirements to qualify for the exemption.
Professional Services Exemption
AB2257 expands the already lengthy list of occupations that may qualify for an exemption from the “ABC” test under the professional services exemption. The following new occupations may be subject to the “Borello” test for employment as a result of AB2257: content contributors, advisors, producers, narrators, or cartographers for certain publications; specialized performers hired to teach a class for no more than a week; appraisers; registered professional foresters; and home inspectors.
AB2257 also eliminates restrictions set forth in AB5 that threatened the journalism industry. Under AB5, the number of “submissions” that independent contractors of various types (including still photographers and photojournalists, videographers, photo editors, freelance writers, translators, editors/copy editors, and illustrators/newspaper cartoonists) could publish in a single forum without sacrificing their contractor status was limited. Now, AB2257 removes the submission cap and, instead, only requires that businesses refrain from displacing existing employees in order to utilize one of these types of contractors.
Music Industry & Performer Exemptions
AB2257 creates several exemptions for the entertainment industry, primarily in the music industry. First, the following occupations involved in creating, marketing, promoting, or distributing sound recordings or musical compositions are exempt from the ABC test: recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers and mixers, musicians, vocalists, photographers, independent radio promoters and certain types of publicists. Notably, however, musicians and vocalists who do not receive royalties from a sound recording or musical composition must be paid the applicable minimum and overtime wages, as though they were employees.
Second, musicians and musical groups engaged for a single-engagement live performance event (i.e., a concert) are exempt from the ABC test unless they:
- Perform as a symphony orchestra, or in a musical theater production, or at a theme park or amusement park;
- Are an event headliner in a venue with more than 1,500 attendees; or
- Perform at a festival that sells more than 18,000 tickets per day.
Finally, individual performance artists, including comedians, improvisers, magicians and illusionists, mimes, spoken word performers, storytellers, and puppeteers, who perform original work they created will qualify for an exemption so long as they are free from the hirer’s control, retain the intellectual property rights related to their performance, set their terms of work and negotiate their rates.
Subject to certain requirements, AB2257 adds exemptions for the following occupations: manufactured housing salespersons; certain individuals engaged by international exchange visitor programs; and competition judges (including amateur umpires and referees).
Broader Governmental Enforcement Powers
AB2257 provides district attorneys the ability to file an injunctive relief action against businesses suspected of misclassifying independent contractors. Previously, under AB5, only the Attorney General and certain city attorneys possessed this power.
Next Step for Employers
It is important to remember that an exemption from AB2257 does not mean employers are totally exempt from any tests and can declare anyone they like an independent contractor. Workers who fall under the new exemptions carved out must still comply with the multi-factor “Borello” test. In addition, many businesses in industries that obtained a carve-out will still be governed by the “ABC” test (and not Borello) if they are unable to satisfy any of up to a dozen specific requirements.
As usual, navigating the constantly changing legal landscape for independent contractor status can be very complicated. Employers should engage legal counsel to assist with an independent contractor analysis and to craft independent contractor agreements that stay compliant with the latest legal developments.
If you need any assistance with an independent contractor analysis or crafting an independent contractor agreement, contact Hackler Flynn & Associates.
DISCLAIMER: Content within this post should not be considered legal advice and is for informational purposes only. Communications made through this post do not create an attorney-client relationship. Hackler Flynn & Associates is not responsible for any content that you may access from third-party resources that may be accessed through or linked to this post. Hackler Flynn & Associates is only licensed to practice in California.
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