AB 2257 – CA’s “Improved” Independent Contractor Law, Explained

Between COVID and the many other “challenging times” we’ve faced in 2020, it’s easy to forget the big employment law developments that occurred just a year ago. So, a little refresher on AB 5 (here).

You may recall that the California Legislature enacted AB 5 last Fall, which overhauled California law with respect to independent contractor relationships. We posted about the law in three parts here here here and wrote an article here. The intent of the law was to expand the California Supreme Court’s ruling in Dynamex Ops. West v. Sup. Court (Lee) 4 Cal.5th 903 (2018) (article here). The California high court created a so-called “ABC Test for independent contractor relationships, but only as applied to certain claims under California’s Industrial Welfare Commission Wage Orders.

In enacting AB 5, the Legislature took the Dynamex ABC Test and applied it to most California wage and hour laws, subject to a number of exceptions. And 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.

So, 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 so tough in part because each element (A B and C) must be proven or the worker is an employee, not a contractor. Under Borello , on the other hand, it’s a “totality of the circumstances,” multi-factor analysis.

AB 5 / AB 2257 merely address various ways that businesses can qualify for evaluation under Borello rather than ABC. It does not provide a way for businesses to avoid independent contractor v. employee scrutiny altogether. But lest anyone think otherwise, Borello is no picnic. It’s just more independent contractor-friendly as compared with the ABC Test.

All of the above – including the specific elements of the ABC Test – is covered in greater detail in the posts and articles linked above.

After AB 5’s enactment, litigation ensued. A couple of courts enjoined the new law as it applied to certain interstate trucker independent contractors, because the law was preempted. Appeals are pending. Other legal challenges initially failed, such as by certain freelance journalists, although appeals may be pending as well. But most of the law took effect. And Uber and Lyft recently were enjoined from continuing to operate under an independent contractor model. They have appealed and the injunctions have been temporarily stayed.

There also was a rather significant backlash against AB 5 – by independent contractors themselves. That’s because the law swept broadly to include a number of freelancers and independent contractors that apparently did not want to be “helped” by the Legislature. As initially written, musicians in a band, freelance photographers and writers, and a number of other traditionally independent contractors would almost certainly fail the ABC test. As a result, the hiring entities risked great liability continuing to hire them. The Legislature and its lobbyists set about amending AB 5 to address some of these concerns, and came up with AB 2257, which is here.

AB 2257 expressly repeals Labor Code section 2750.3, which is the main part of old AB 5. Instead, it enacts new sections 2775-85 of the Labor Code. It’s a bit more user friendly in that respect. Let’s review the major changes.

Main ABC Test

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 here.

But AB 2257 contains new exceptions and modifies some of the old ones. Here are the main ones.

Business-To-Business

AB 5’s “Business to Business” exception, formerly 2750.3(e) is amended and is re-codified into Labor Code section 2776. The “business-to-business” exception has been relaxed a little in section 2776. Here are the key changes:

• 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. For example, if a company provided extra wait staff to a hotel, the company providing the business-business exception automatically would not apply and the vendor agreement would have to be analyzed under the ABC Test. Why? because the vendor’s wait staff waited on the hotel’s customers. Under AB 2257, though, this subparagraph 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 addition will allow some business-to-business contracts to escape the ABC Test, even though the vendor provides workers to the other business.

The contract with the business service provider is in writing and specifies 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 contract had to be in writing. But now it has to 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.”

The business service provider maintains a business location, which may include the business service provider’s residence, that is separate from the business or work location of the contracting business.

Under AB 5, the business service provider had to have a separate business location. AB 2257 added the “business service provider’s residence,” which will allow for small businesses and individual sole proprietorships to contract with other businesses and avoid the ABC Test.

Consistent with the nature of the work, the business service provider provides its own tools, vehicles, and equipment to perform the services, not including any proprietary materials that may be necessary to perform the services under the contract.

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

AB 5 addressed “referral agencies,” and when they were exempt from the ABC Test, in section 2750.3(g). AB 2257 amended the referral agency exemption and codified it in section 2777.

(B) Under this paragraph, referrals for services shall include, but are not limited to, 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.

(C) Under this paragraph, referrals for services do not include services provided in an industry designated by the Division of Occupational Safety and Health or the Department of Industrial Relations as a high hazard industry pursuant to subparagraph (A) of paragraph (3) of subdivision (e) of Section 6401.7 of the Labor Code or referrals for businesses that provide janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction services other than minor home repair.

AB 2257 added this provision in light of the expanded list of businesses that may be referred by referral agencies:

(4) If there is an applicable professional licensure, permit, certification, or registration administered or recognized by the state available for the type of work being performed for the client, the service provider shall certify to the referral agency that they have the appropriate professional licensure, permit, certification, or registration. The referral agency shall keep the certifications for a period of at least three years.

The revised section also made some changes regarding the fee arrangements that referred vendors may charge clients, and the fees that referral agencies may charge to qualify for the Borello test.

(10) Without deduction by the referral agency, the service provider sets their own rates, negotiates their rates with the client through the referral agency, negotiates rates directly with the client, or is free to accept or reject rates set by the client.

(11) The service provider is free to accept or reject clients and contracts, without being penalized in any form by the referral agency. This paragraph does not apply if the service provider accepts a client or contract and then fails to fulfill any of its contractual obligations.

(3) (A) “Referral agency contract” is the agency’s contract with clients and service providers governing the use of its intermediary services described in paragraph (2). The intermediary services provided to the service provider by the referral agency are limited to client referrals and other administrative services ancillary to the service provider’s business operation.

(B) A referral agency’s contract may include a fee or fees to be paid by the client for utilizing the referral agency. This fee shall not be deducted from the rate set or negotiated by the service provider as set forth in paragraph (10) of subdivision (a).

Basically, what this means is that a “referral agency” of, let’s say, “consulting services” may maintain separate status from the consultants themselves, under Borello , as long as both the referred consultant and the referral service comply with section 2777. The good news is that there is a larger group of business-types that may be “referred” without the ABC Test applying.

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 prove to establish the Borello test applies are identical in AB 5 and AB 2257. However, the definition of “professional services” is substantially changed to include more “professionals”. Here’s the new provision:

(A) Marketing, provided that the contracted work is original and creative in character and the result of which depends primarily on the invention, imagination, or talent of the individual or work that is an essential part of or necessarily incident to any of the contracted work.

(B) Administrator of human resources, provided that the contracted work is predominantly intellectual and varied in character and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.

(i) A person regulated by the Attorney General under Article 2.6 (commencing with Section 17550) of Chapter 1 of Part 3 of Division 7 of the Business and Professions Code.

(ii) An individual who is a seller of travel within the meaning of subdivision (a) of Section 17550.1 of the Business and Professions Code and who is exempt from the registration under subdivision (g) of Section 17550.20 of the Business and Professions Code.

(ii) For the purposes of this subparagraph, “fine artist” means an individual who creates works of art to be appreciated primarily or solely for their imaginative, aesthetic, or intellectual content, including drawings, paintings, sculptures, mosaics, works of calligraphy, works of graphic art, crafts, or mixed media.

(G) Services provided by an enrolled agent who is licensed by the United States Department of the Treasury to practice before the Internal Revenue Service pursuant to Part 10 of Subtitle A of Title 31 of the Code of Federal Regulations.

(i) By a still photographer, photojournalist, videographer, or photo editor who works under a written contract that specifies the rate of pay and obligation to pay by a defined time, as long as the individual providing the services is not directly replacing an employee who performed the same work at the same volume for the hiring entity; the individual does not primarily perform the work at the hiring entity’s business location, notwithstanding paragraph (1) of subdivision (a); and the individual is not restricted from working for more than one hiring entity. This subclause is not applicable to a still photographer, photojournalist, videographer, or photo editor who works on motion pictures, which is inclusive of, but is not limited to, theatrical or commercial productions, broadcast news, television, and music videos. Nothing in this section restricts a still photographer, photojournalist, photo editor, or videographer from distributing, licensing, or selling their work product to another business, except as prohibited under copyright laws or workplace collective bargaining agreements.

(ii) To a digital content aggregator by a still photographer, photojournalist, videographer, or photo editor.

(I) “Photo editor” means an individual who performs services ancillary to the creation of digital content, such as retouching, editing, and keywording.

(II) “Digital content aggregator” means a licensing intermediary that obtains a license or assignment of copyright from a still photographer, photojournalist, videographer, or photo editor for the purposes of distributing that copyright by way of sublicense or assignment, to the intermediary’s third party end users.

(J) Services provided by a freelance writer, translator, editor, copy editor, illustrator, or newspaper cartoonist who works under a written contract that specifies the rate of pay, intellectual property rights, and obligation to pay by a defined time, as long as the individual providing the services is not directly replacing an employee who performed the same work at the same volume for the hiring entity; the individual does not primarily perform the work at the hiring entity’s business location, notwithstanding paragraph (1) of subdivision (a); and the individual is not restricted from working for more than one hiring entity.

(K) Services provided by an individual as a 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 works under a written contract that specifies the rate of pay, intellectual property rights and obligation to pay by a defined time, as long as the individual providing the services is not directly replacing an employee who performed the same work at the same volume for the hiring entity, the individual does not primarily perform the work at the hiring entity’s business location notwithstanding paragraph (1) of subdivision (a); and the individual is not restricted from working for more than one hiring entity.

(L) Services provided by a licensed esthetician, licensed electrologist, licensed manicurist, licensed barber, or licensed cosmetologist provided that the individual:

(ii) Sets their own hours of work and has sole discretion to decide the number of clients and which clients for whom they will provide services.

(v) If the individual is performing services at the location of the hiring entity, then the individual issues a Form 1099 to the salon or business owner from which they rent their business space.

(vi) This subparagraph shall become inoperative, with respect to licensed manicurists, on January 1, 2022.

(M) A specialized performer hired by a performing arts company or organization to teach a master class for no more than one week. “Master class” means a specialized course for limited duration that is not regularly offered by the hiring entity and is taught by an expert in a recognized field of artistic endeavor who does not work for the hiring entity to teach on a regular basis.

(N) Services provided by an appraiser, as defined in Part 3 (commencing with Section 11300) of Division 4 of the Business and Professions Code.

(O) Registered professional foresters licensed pursuant to Article 3 (commencing with Section 750) of Chapter 2.5 of Division 1 of the Public Resources Code.

(b) Section 2775 and the holding in Dynamex do not apply to the following, which are subject to the Business and Professions Code:

(1) A real estate licensee licensed by the State of California pursuant to Division 4 (commencing with Section 10000) of the Business and Professions Code, for whom the determination of employee or independent contractor status shall be governed by subdivision (b) of Section 10032 of the Business and Professions Code. If that section is not applicable, then this determination shall be governed as follows:

(C) For all other purposes in the Labor Code by Borello. The statutorily imposed duties of a responsible broker under Section 10015.1 of the Business and Professions Code are not factors to be considered under the Borello test.

(2) A home inspector, as defined in Section 7195 of the Business and Professions Code, and subject to the provisions of Chapter 9.3 (commencing with Section 7195) of Division 3 of that code.

(3) A repossession agency licensed pursuant to Section 7500.2 of the Business and Professions Code, for whom the determination of employee or independent contractor status shall be governed by Section 7500.2 of the Business and Professions Code, if the repossession agency is free from the control and direction of the hiring person or entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

One of the biggest criticisms of AB 5 was that it could result in “employment relationships” between two unrelated persons or businesses showing up to perform services at a one-day event, if the other ABC Factors could not be satisfied. For example, a caterer might hire a DJ at a wedding, each of whom had a separate business. But AB 5 might create an employment relationship even though an independent contractor relationship was clearly intended. So, the Legislature added section 2779 to address this issue:

(a)Section 2775 and the holding in Dynamex do not apply to the relationship between two individuals wherein each individual is acting as a sole proprietor or separate business entity formed as a partnership, limited liability company, limited liability partnership, or corporation performing work pursuant to a contract for purposes of providing services at the location of a single-engagement event, as defined below, under the following conditions:

(1) Neither individual is subject to control and direction by the other, in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(3) The written contract between both individuals specifies the total payment for services provided by both individuals at the single-engagement event, and the specific rate paid to each individual.

(4) Each individual maintains their own business location, which may include the individual’s personal residence.

(5) Each individual provides their own tools, vehicles, and equipment to perform the services under the contract.

(6) If the work is performed in a jurisdiction that requires an individual to have a business license or business tax registration, then each individual has the required business license or business tax registration.

(7) Each individual is customarily engaged in the same or similar type of work performed under the contract or each individual separately holds themselves out to other potential customers as available to perform the same type of work.

(8) Each individual can contract with other businesses to provide the same or similar services and maintain their own clientele without restrictions.

(b) “Single-engagement event” means 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.

(c) “Services” under this section do not include services provided in an industry designated by the Division of Occupational Safety and Health or the Department of Industrial Relations as a high hazard industry pursuant to subparagraph (A) of paragraph (3) of subdivision (e) of Section 6401.7 or janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction services other than minor home repair.

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 as follows (highlights indicate new or different)

Section 2775 and the holding in Dynamex do not apply to the following occupations as defined in the paragraphs below, and instead, the determination of employee or independent contractor status for individuals in those occupations shall be governed by Borello:

(a) A person or organization who is licensed by the Department of Insurance pursuant to Chapter 5 (commencing with Section 1621), Chapter 6 (commencing with Section 1760), or Chapter 8 (commencing with Section 1831) of Part 2 of Division 1 of the Insurance Code or a person who provides underwriting inspections, premium audits, risk management, or loss control work for the insurance and financial service industries.

(b) A physician and surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the State of California pursuant to Division 2 (commencing with Section 500) of the Business and Professions Code, performing professional or medical services provided to or by a health care entity, including an entity organized as a sole proprietorship, partnership, or professional corporation as defined in Section 13401 of the Corporations Code. Nothing in this subdivision shall circumvent, undermine, or restrict the rights under federal law to organize and collectively bargain.

(c) An individual who holds an active license from the State of California and is practicing one of the following recognized professions: lawyer, architect, landscape architect, engineer, private investigator, or accountant.

(d) A securities broker-dealer or investment adviser or their agents and representatives that are either of the following:

(1) Registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority.

(2) Licensed by the State of California under Chapter 2 (commencing with Section 25210) or Chapter 3 (commencing with Section 25230) of Division 1 of Part 3 of Title 4 of the Corporations Code.

(e) A direct sales salesperson as described in Section 650 of the Unemployment Insurance Code, so long as the conditions for exclusion from employment under that section are met.

(f) A manufactured housing salesperson, subject to all obligations under Part 2 (commencing with Section 18000) of Division 13 of the Health and Safety Code, including all regulations promulgated by the Department of Housing and Community Development relating to manufactured home salespersons and all other obligations of manufactured housing salespersons to members of the public.

(g) A commercial fisher working on an American vessel. * * * *(4) This subdivision shall become inoperative on January 1, 2023, unless extended by the Legislature.

(h) A newspaper distributor working under contract with a newspaper publisher, as defined in subparagraph (A), and a newspaper carrier working under contract either with a newspaper publisher or newspaper distributor. ***** (2) This subdivision shall become inoperative on January 1, 2021, unless extended by the Legislature.

(i) 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 under Part 62 (commencing with Section 62.1) of Title 22 of the Code of Federal Regulations for the purpose of conducting, instead of participating in, international and cultural exchange visitor programs and is in full compliance with Part 62 (commencing with Section 62.1) of Title 22 of the Code of Federal Regulations.

(j) 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.

AB 5’s section 2750.3(f) covered certain exemptions from the ABC Test applicable to the contracts between contractors and subcontractors in the construction industry. That section appears to have been kept as is and moved to section 2781.

The music industry was quite off-put by AB 5 to say the least. The Legislature added Labor Code section 2780 to exempt rom the ABC Test and impose other requirements on sound recording and other music industry workers. I’m not going to include this long, detailed section here. If it’s applicable to you, please review it at section 2780 linked here.

Apparently a “data aggregator” is someone who performs paid surveys or market research (per definition below). It seems the participants were treated as independent contractors and perhaps these relationships would fail the ABC Test if there was no legislative fix?

Well, it appears “data aggregators” must have a strong lobbyist like the music industry. Because data aggregators got their own section in AB 2257, which is now Labor Code section 2782. It appears that data aggregators contracting with “an individual providing feedback to the data aggregator” will escape the ABC Test if they satisfy the following criteria:

(A) The individual is free from control and direction from the data aggregator with respect to the substance and content of the feedback.

(B) Any consideration paid for the feedback provided, if prorated to an hourly basis, is an amount equivalent to or greater than the minimum wage.

(C) The nature of the feedback requested requires the individual providing feedback to the data aggregator to exercise independent judgment and discretion.

(D) The individual has the ability to reject feedback requests, without being penalized in any form by the data aggregator.

(A) “Data aggregator” is a business, research institution, or organization that requests and gathers feedback on user interface, products, services, people, concepts, ideas, offerings, or experiences from individuals willing to provide it.

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.

Interestingly, AB 5 amended the Workers’ Compensation Act to reference section 2750.3. See Labor Code section 3351 here. The intent was to apply the ABC Test to determine if injured workers were covered by the Workers’ Compensation Act, That would obviously include more workers under the Act.

But this new AB 2257 does not address Labor Code section 3351, and leaves in place that reference to section 2750.3. Perhaps there is additional legislation coming to address how independent contractor relationships are handled under Workers’ Compensation law. For now, though, unless I missed something, it appears the Workers’ Compensation Act’s definition of “employee” references a repealed statute.

Taxation

AB 2257 implements a number of changes to the Revenue and Taxation Code that were not included within AB 5. For example, with respect to personal income tax, the Revenue and Taxation Code, section 17020.12 used to exclusively borrow the definition of “employee” from federal law. AB 2257 amends section 17020.12 to say:

(a) For the purposes of this part, except as otherwise provided, the determination of whether an individual is an employee shall be governed by Section 1 of Article 1.5 of the Labor Code.

(b) Section 7701(a)(20) of the Internal Revenue Code, relating to definition of “employee,” shall apply, except as otherwise provided.

You will see a number of other amendments to other parts of the Revenue and Taxation Code where the Legislature added similar language. The purpose apparently is to import the ABC Test into the California Tax Code where employment status is a factor in determining tax status.

OK, that’s it for now. I’m sure our busy Chairwoman will have some more to say about AB 2257 in the coming weeks. So, stay tuned to our website and newsletter.