California Legislature Passes Sweeping Clean-Up Bill to AB 5

On September 4, 2020, Governor Gavin Newsom signed Assembly Bill 2257 (AB 2257), the eagerly anticipated “clean up” legislation revising Assembly Bill 5 (AB 5), California’s stringent independent contractor law. AB 5 wrote into law the “ABC” test first announced by the California Supreme Court in Dynamex Operations W. v. Superior Court, 4 Cal. 5th 903 (2018).

See our prior advisories on Dynamex and AB 5.

Although AB 5 afforded some relief from Dynamex by establishing many exceptions to the ABC test, these were narrow and in some cases confusing. Some of these exceptions, and some omitted exceptions, were also controversial.

Months of intensive industry lobbying to amend AB 5 resulted in dozens of proposed amendments. The net result of this effort is AB 2557, which clarifies and changes previous exceptions such as lifting the 35 submission per year cap on work by freelance writers and photographers, and adds new ones, including for musicians, translators, landscape architects, competition judges and referees, and others. The changes are effective immediately and are even, to some degree, retroactive.

The following are frequently asked questions about where things stand as a result of AB 2257. There are many nuances and caveats to these answers; individual situations should be analyzed in their own context.

Q. What is the starting point for determining whether a worker can be classified as an independent contractor in California?

A. The basic test—the starting point—is still the ABC test. To be classified as an independent contractor, a person must satisfy these three criteria:

• 1. Free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact; and
• 2. Perform work that is outside the usual course of the hiring entity’s business; and
• 3. Be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Workers who do not pass this test must be classified as employees unless they come within an exception stated in AB 2257 and they pass the so-called Borello test.

Q. What is the Borello test, and why is it significant?

A. The test was established by the California Supreme Court in S. G. Borello & Sons, Inc. v. Dep't of Indus. Relations, 48 Cal. 3d 341 (1989). It is the traditional multi-factor test, with the primary factor being the “right to control;” that is, to properly classify a worker as an independent contractor, the hiring entity cannot control the manner and means by which the person provided the services. The Borello test was the law in California before Dynamex. The significance now is that even if a person comes within one of the AB 2257 exceptions, he or she still must pass the Borello test.

Q. What exceptions to the ABC Test exist after AB 2257? 

A. There are numerous exceptions, and not all are covered in this summary. Here are the ones most broadly applicable:

Revised: Business–to-Business Exception (Labor Code Section 2776)

A business entity, including an individual operating as a sole proprietorship, other than a licensed contractor, may be classified as an independent contractor (subject to the Borello test) if all of the following criteria are satisfied.

• The provider is free from the control and direction of the contracting business;
• Services are provided directly to the contracting business and not that business’s customers unless employees of the provider are performing the services for the customer and the provider regularly engages in this business;
• There is a written contract that includes certain required terms (payment amount or method and due date);
• The provider has a business license or tax registration if required in the location where the services are performed;
• The provider maintains a business location separate from the hiring entity (which may include the contractor’s home);
• The provider is customarily engaged in an independently established business of the same nature as the services;
• The provider is free to contract with others for the same or like services;
• The provider advertises and holds itself out to the public as available for like services;
• The provider uses its own tools, vehicles, and equipment, not including any proprietary materials that are necessary to perform the services;
• The provider negotiates its own rates; and
• The provider can set its own hours and work location consistent with the nature of the work.

Revised: Professional Services Exception (Labor Code Section 2778)

A person may be classified as an independent contractor (subject to the Borello test) if he or she performs “professional services” as defined in the law and satisfies all of the following criteria.

• Maintains a business location, which may be their residence, separate from the hiring entity, but with certain exceptions (stated below) the person may choose to perform services at the hiring entity’s location;
• Has a business license or tax registration if required in the location where the services are performed and a professional license if required by the profession;
• Has the ability to set or negotiate their own rates;
• Outside of project completion dates and reasonable business hours, can set their own hours;
• Is customarily engaged in the same type of work for another hiring or holds themselves out to potential customers for that type of work; and
• Customarily and regularly exercises discretion and independent judgment in the performance of the services.

There is a long list of “professional services” that potentially come within this exception. They include:

• Marketing, provided that the work is original and creative and meets other criteria.
• Administrator of human resources, provided that the work is predominantly intellectual and varied and meets other criteria.
• Travel agent, provided they either are regulated or are exempt from registration.
• Graphic design.
• Grant writer.
• Fine artist, defined as someone who creates work of art appreciated for the imaginative, aesthetic, or intellectual content, including paintings, sculptures, etc.
• Enrolled agent licensed by the U.S. Treasury Department.
• Payment processing agent through an independent organization.
• Still photographer, photojournalist, videographer, or photo editor who does not work in motion pictures (including theatrical or commercial productions, broadcast news, television, and music videos) who satisfies these requirements:
  
  • Works under a written contract specifying the rate of pay and deadline for payment;
  • Is not replacing an employee who performed the same work at the same volume for the hiring entity;
  • Does not primarily perform the work at the hiring entity’s location; and
  • Is not restricted from working for other entities.

  Notably, the previous limit of 35 submissions per year has been removed for this exception.

• Freelance writer, translator, editor, copy editor, illustrator, newspaper cartoonist, content contributor, advisor, producer, narrator, or cartographer for a journal, book, periodical, evaluation, other publication or educational, academic or instructional work in any format or media who satisfies these requirements:
  
  • Works under a written contract specifying the rate of pay, deadline for payment, and intellectual property rights;
  • Is not replacing an employee who performed the same work at the same volume for the hiring entity;
  • Does not primarily perform the work at the hiring entity’s location; and
  • Is not restricted from working for other entities.

  As with the above photographer exception, the 35-submission limit has been removed for the “freelancer” exception.

• Licensed esthetician, electrologist, manicurist, barber, or cosmetologist provided certain requirements are satisfied.
• Specialized performers hired by a performing arts company or organization to teach a “master class” for no more than one week.
• Licensed real estate appraisers, licensed real estate agents (with caveats), home inspectors, and repossession agents.

Revised: Referral Agency Exception (Labor Code Section 2777)

A service provider, including an individual operating as a sole proprietorship, that provides services to clients through a referral agency may be classified as an independent contractor (subject to the Borello test) if the provider satisfies all of the following criteria.

• The provider is free from the control and direction of the referral agency both as a matter of contract and in fact;
• If the work is performed in a jurisdiction that requires a business license or business tax registration, or if the work requires a professional license, the provider has satisfied the requirements and certifies compliance to the referral agency;
• Services are provided in the provider’s name and not the name of the referral agency;
• The provider provides their own tools and supplies;
• The provider is customarily engaged or was previously engaged in an independently established business or trade of the same nature;
• The referral agency does not restrict the provider from maintaining a clientele and the provider is free to seek work elsewhere, including through a competing referral agency;
• The provider sets their own hours and terms of work or negotiates these with the client;
• Without deduction by the referral agency, the provider sets their own rates, or negotiates the rates through the agency or directly with the client, or is free to accept or reject rates set by the client; and
• The provider is free to accept or reject clients and contracts without penalty unless a client or contract has been accepted.

For purposes of this exception, a “client” is either an individual contracting for services, or a business that uses a referral agency to contract for services that are otherwise not provided on a regular basis at the client’s business location, or to contract for services that are outside of the client’s usual course of business.

A “referral agency” is a business that provides clients with service providers except those in high hazard industries or the janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction industries.

Examples of referral services that can invoke this exception are tutors, youth sports coaches, interpreting services, consulting, and animal services.

New: Recording Industry Exception (Labor Code Section 2780)

A new exception has been created for:

• Recording artists, songwriters, lyricists, composers and proofers, artists’ managers;
• Record producers and directors;
• Engineers and mixers;
• Musicians engaged in sound recordings;
• Vocalists;
• Photographers working on recording photo shoots, album covers, and for other publicity purposes;
• Independent radio promoters; and
• Others engaged in the creation, production, marketing, or independent music publicist services mainly related to the creation, marketing, promotion or distribution of sound recordings or musical compositions except those on film and television unit production crews working on live or recorded performances for audiovisual works.

Individuals in these categories may be classified as independent contractors (subject to the Borello test) if they satisfy a long list of criteria. Likewise, musicians or a musical group may be contractors (subject to the Borello test) for the purpose of a single engagement, unless the group performs in an orchestra, plays at a theme/amusement park, performs in a musical theater production, the group is the headliner of a performance with more than 1,500 attendees, or the group performs at a festival that sells more than 18,000 tickets per day.

Individual performance artists playing their original work may also be classified as contractors so long as they are free from the control and direction of the hiring entity, retain the rights of their intellectual property, set their own terms of work, are able to negotiate their rates, and are free to accept or reject performance engagements.

New: Single-Engagement Event Exception (Labor Code Section 2779)

The relationship between two individuals or business entities created for purposes of providing services at the location of a single-engagement event, defined as 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, may be classified as independent contractors (if they satisfy the Borello test) and if the following requirements are satisfied:

• Neither individual is subject to the control or direction of the other;
• Each individual has the ability to negotiate their rate of pay;
• The written contract specifies the total payment for services and the amount paid to each;
• Each individual maintains their own business location, which may include their home;
• Each individual provides their own tools, vehicles, and equipment;
• If the work is performed in a jurisdiction that requires a business license or business tax registration, each individual has complied;
• Each individual is customarily engaged in the same or similar type of work or holds themselves out to other potential customers; and
• Each individual can contract with other businesses and maintain their own clientele without restrictions.

Q. Are there other exceptions?

A. Yes. The list goes on. Here are some of the other occupations that may be classified as contractors—again, if they pass the Borello test and satisfy a variety of other requirements.

• Construction workers.
• Data aggregators.
• Individuals who provide underwriting inspections, premium audits, risk management, or loss control work for insurance and financial service industries.
• Landscape architects.
• Manufactured housing salesperson.
• Commercial fishers working on an American vessel (until January 1, 2023, unless extended by the Legislature).
• Newspaper distributors working under contract with a newspaper publisher and newspaper carriers under contract either with the publisher or distributor (until January 1, 2022, per AB 323, passed on August 31, 2020, but not yet signed by Governor Newsom).
• Individuals engaged by an international exchange visitor program.
• Competition judges such as amateur umpires or referees.

Q. Is AB 2257 the final word?

A. Likely not. On November 3, 2020, Californians will vote on Proposition 22, which will determine if app-based drivers and delivery workers can operate as independent contractors or will remain subject to the ABC test. The U.S. Department of Labor recently published draft regulations for identifying independent contractors under federal wage and hour law, and the National Labor Relations Board has its own test for identifying independent contractors in the union representation context.

Presidential candidate Joe Biden has said that if elected, he will work with Congress to establish a federal standard modeled on the ABC test for all labor, employment, and tax laws. So this will continue to be an evolving area of law.

Q. How is this law enforced? 

A. Previously, significant funds were allocated to state agencies such as the Employment Development Department (EDD) to enforce the ABC test. AB 2257 adds that agencies can seek injunctive relief against companies that misclassify workers. Significantly, California district attorneys have been added to the list of officials with the authority to bring enforcement actions. And, of course, employees claiming to have been misclassified can sue individually or by way of class action lawsuits.