Relief Pitching: California Makes Changes To the ABC Test for Independent Contractors Through Passage of AB 2257

09.16.2020

Governor Gavin Newsom signed AB 2257 on September 4, 2020, making further immediate and significant revisions to the independent contractor classification tests in California.

In April 2018, the California Supreme Court issued its decision in Dynamex, creating a new standard for evaluating independent contractor status in California—the ABC Test. Dynamex Operations v. Superior Court (2018) 4 Cal. 5th 903. In October 2019, the California legislature passed AB 5, expanding the “ABC Test” and cracking down on the so-called “gig economy.” AB 5 significantly impacted many industries that had traditionally relied on independent contractors, effectively precluding the use of such contractors by requiring they be classified as employees based on the ABC Test. AB 5 allowed for some, albeit narrow, exemptions from its application. Our prior analysis of AB 5 is here.

Under the ABC Test, a worker is presumed to be an employee unless the company proves that the worker:

(A) Is free from the control and direction of the company in performing work, both practically and in the contractual agreement between the parties; and

(B) Performs work that is outside the usual course of the company’s business; and

(C) Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company.

AB 2257 modifies AB 5 by expanding the pool of available exemptions from the ABC Test, some of which will apply retroactively. In addition, some existing exemptions were altered. AB 2257 is intended to limit the significant impact of AB 5 on numerous industries by specifically excluding them from the coverage of the ABC Test. However, the ABC Test remains the standard for evaluating independent contractor classification in most industries and situations.

Importantly, an exemption from the ABC Test does not mean that workers automatically qualify as independent contractors. Rather, it means that the ABC Test does not apply to the independent contractor analysis, and another test (the Borello test) will be used instead. S.G. Borello & Sons Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341. Workers must still satisfy the Borello test in order to be properly classified as independent contractors.

The legislature passed AB 2257 as an urgency bill and therefore it takes effect immediately. AB 2257’s new exemptions and changes to AB 5 are detailed below.

AB 2257’s Changes to the Business-To-Business Exemption

AB 5 creates an exemption from the ABC Test for “bona fide business-to-business contracting relationships” where an independent contractor “acting 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.”

AB 2257 modifies the problematic requirement under the business-to-business test that the services provided by the subcontractor must be provided to the hiring entity only and not the hiring entity’s customers or clients. AB 2257 provides that this requirement does not apply where 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.

AB 2257 clarifies that the business-to-business exemption also applies where a “public agency or quasi-public corporation” has entered into an agreement with a contractor.

New “Single-Engagement” Business-To-Business Exemption

AB 2257 creates a new exemption for individual business owners who contract with one another “for purposes of providing services at the location of a single-engagement event,” if certain criteria are met. The exemption provides that the ABC Test does 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.”

Expansion of the Referral Agency Exemption

AB 5 contained a “referral agency” exemption for a business that contracts with another business to obtain client referrals. AB 2257 clarifies and expands this exemption, stating that it applies to a non-exclusive list of additional services, including “graphic design, web design, photography, tutoring, consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors, minor home repair, moving, errands, furniture assembly, animal services, dog walking, dog grooming, picture hanging, pool cleaning, yard cleanup, and interpreting services.”

Relief for the Professional Services Exemption

AB 5 exempted numerous professions from application of the ABC Test under a “professional services” exemption. AB 2257 expands this list to include: content contributors, advisors, producers, narrators or cartographers for certain publications (if existing employees are not replaced); specialized performers who teach a class for no more than one week; appraisers; registered professional foresters; and home inspectors.

AB 2257 significantly modifies the provision of AB 5 that restricted the number of submissions that could be made to a business by independent contractor as it relates to: still photographers, photojournalists, videographers, photo editors, freelance writers, translators, editors/copy editors and illustrators/newspaper cartoonists. AB 2257 eliminates the prior cap on submissions (35) and provides that businesses must avoid replacing their current employees with independent contractors.

Music Industry & Performer Exemptions

AB 2257 also creates new entertainment-industry exemptions, including many for musicians.

The following occupations are now 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 publicists. Importantly, however, musicians and vocalists who are not paid royalties from a sound recording or musical composition must be paid minimum and overtime wages.

Moreover, AB 2257 adds an exemption for musicians and musical groups engaged for a single-engagement live performance event unless the musicians/groups: (a) perform as a symphony orchestra, or in a musical theater production, or at a theme park or amusement park; (b) are an event headliner in a venue with more than 1,500 attendees; or (c) perform at a festival that sells more than 18,000 tickets per day.

AB 2257 also adds an exemption for individual performance artists (comedians, improvisers, magicians and illusionists, mimes, spoken word performers, storytellers, and puppeteers) who perform original work. This exemption requires the contractor be free from the hirer’s control, retain intellectual property rights in connection with the performance, set their own terms of work and negotiate their own rates.

Other New Exemptions

AB 2257 also adds certain limited exemptions for manufactured housing salespersons; some individuals engaged by international exchange visitor programs and competition judges (including amateur umpires and referees).

New Enforcement Mechanism

AB 2257 authorizes district attorneys to file injunctive relief actions against businesses who misclassify independent contractors.

Now What?

Again, an exemption from the ABC Test does not mean that workers automatically qualify as independent contractors. Rather, it means that the ABC Test does not apply to the independent contractor analysis, and Borello will instead be used. Workers must still satisfy the Borello test in order to be properly classified as independent contractors.

While AB 2257 significantly modifies AB 5 and provides some relief to limited subset of industries, AB 5 and AB 2257 remain a complex and fertile framework to challenge whether a service provider is an independent contractor under the current law or a misclassified employee. Much of AB 5 remains untested in the court system, in part due to the overwhelming effect of the COVID-19 pandemic. The application of the above exemptions, qualifications and exceptions, in addition to the original set created by AB 5, remains unclear in many cases. While the use of independent contractors may be appropriate in certain instances, the continued use of independent contractors in California remains a high-risk proposition (as many in the gig economy have come to know all too well). Companies that continue to use independent contractors in their business are strongly encouraged to consult with their usual employment counsel, or one of the authors, for specific guidance.