Since our previous update on the “ABC Test” (https://www.pkwhlaw.com/blog/assembly-bill-5), there have been changes to California laws regarding worker classifications. On September 4, 2020, Governor Newsom signed A.B. 2257, which is a new law that revises the codification of the ABC test that was originally done through A.B. 5 (2019). A.B. 2257 is an urgency statute, so the law immediately went into effect once the Governor approved the bill.
According to the state Assembly, the purpose of the bill is to recast and clarify exemptions to the ABC test for employment status. This new law creates numerous exceptions to A.B. 5 (2019), and the application of the new exceptions is retroactive in certain cases. Additionally, under this new law, district attorneys and some city attorneys will now be able to join the California Attorney General in enforcing misclassification actions.
Background on ABC Test
Under the previously existing law, the ABC test, “a person providing labor or services for remuneration is considered an employee rather than an independent contractor unless the hiring entity demonstrates that (A) the person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, (B) the person performs work that is outside the usual course of the hiring entity’s business, and (C) the person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.” Only a handful of occupations and business relationships were exempt from the application of this ABC test, and instead were “governed by the multifactor test previously adopted in the case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341,” referred to as the Borello test.
Important Aspects That Did Not Change in A.B. 2257
The ABC test factors are still the same. If the ABC test does not apply, then the Borello test must be applied to the exempted occupations and business relationships to determine proper classifications. The Borello test has thirteen different factors that are considered and weighed based on all relevant facts.
New Exceptions to the ABC Test Created by A.B. 2257:
Business to Business Contracting Relationships
Referral Agency and Service Provider Contracting Relationships
Professional Service Contracting Relationships
Contracting Relationships Between and Individual Performing Work and an Individual Providing Services at a Single-Engagement Event
Contracting Relationships Between a Contractor and an Individual Performing Work Pursuant to a Subcontract in the Construction Industry
Contracting Relationships Between a Data Aggregator and an Individual Providing Feedback to the Data Aggregator
Occupations in Connection with Creating, Marketing, Promoting, or Distributing Sound Recordings or Musical Composition
Contracting Relationship Between a Motor Club Holding a Certificate of Authority and an Individual Performing Services Pursuant to a Contract Between the Motor Club and a Third Party
Additional Various Exemptions
Additional Various Positions Affected by the New Exemptions (List is Not Exhaustive):
Persons who provide underwriting inspections, premium audits, risk management, or loss control work
Persons engaged in international exchange visitor programs
Manufactured housing salespersons
Freelance writers
Freelance photographers (still photographers, photojournalists)
Editors
Newspaper cartoonists
Artists
Cosmetologists
Accountants
Home Inspectors
Competition Judges
Referees
Small Medical Groups
Business to Business Exemption
The ABC test does not apply to bona fide business-to-business contracting relationships, as defined by Section 2776 of the Labor Code, under certain conditions. A bona fide business-to-business contracting relationship occurs if an individual acting as a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business or to a public agency or quasi-public corporation (“contracting business”). When this type of relationship exists, the determination of employee or independent contractor status of the business service provider shall be governed by the Borello test, if the contracting business can demonstrate that all of the following twelve factors are satisfied:
Business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
Business service provider is providing services directly to the contracting business rather than to customers of the contracting business. (this subparagraph does not all to all business service providers).
Contract with the business service provider is in writing and specifies the payment amount, including applicable rate of pay for services to be performed and the due date of payment for such services.
If the work is performed in a jurisdiction that requires a business license or business tax registration, the business is required to have that license or registration.
Business service provider maintains a business location (which can include a residence) that is separate from the business or work location of the contracting business.
Business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
Business service provider can contract with other businesses to provide the same or similar services and maintain a clientele without the restriction of the hiring entity.
Business service provider holds itself out and advertises to the public that it is able to provide the same or similar services.
Business service provides its own tools, vehicles, and equipment (consistent with the nature of the work) to perform the services, not including and proprietary materials that may be necessary to perform the services under the contract.
Business service provide can negotiate its own rates.
Business service provider can set its own hours and location of work, consistent with the nature of the work.
Business service provider is not performing the type of work that would require a license from the Contractor’s State License Board, in accordance with chapter 9 of Division 3 of the Business and Professions Code.
If all twelve of these factors are met, the determination of employee or independent contractor status is governed by the Borello test.
Referral Agency and Service Provider Relationships
The ABC test also does not apply to the relationship between referral agencies and service providers, as defined by Section 2777 of the Labor Code. A “referral agency” is a business that provides clients with referrals for service providers to provide services under a contract. A “service provider” is an individual acting as a sole proprietor or business entity that agrees to the referral agency’s contract and uses the referral agency to connect with clients. If an individual acting as a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership, or corporation (“service provider”) provides services to clients through a referral agency, Borello applies to the determination of whether the service provider is an employee or independent contract if the following eleven criteria are satisfied:
Service provider is free from the control and direction of the referral agency in connection with the performance of the work for the client.
If the work is performed in a jurisdiction that requires the service provider to have a business license or business tax registration to provide the contracted services, the service provider should have that license or registration. Referral agency must keep the certifications for at least three years.
If the work for the client requires a contractor’s license pursuant to Chapter 9, Division 3 of the Business and Professions Code, the service provider should have that required license.
If any applicable professional licensure, permit, certification, or registration administered or recognized by the state is required for the service being performed, the service provider shall have those appropriate items. Referral agency must keep the certifications for at least three years.
Service provider delivers services to the client under the service providers name, and is not required to deliver the services under the name of the referral agency.
Service provider provides its own tools and supplies to perform the services.
Service provider is customarily engaged, or previously was engaged, in an independent business or trade of the same nature as, or related to, the work performed for the client.
Referral agency does not restrict service provider from maintaining a clientele, and the service provider is free to seek work elsewhere, including with competing referral agencies.
Service provider sets their own hours and terms of work, or negotiates those hours and terms directly with the client.
Without deductions 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.
Service provider is free to accept or reject clients and contracts, without being penalized in any form by the referral agency.
If all eleven of these factors are met, the determination of employee or independent contractor status is governed by the Borello test.
Contracts for Professional Services
The ABC test does not apply to contracts for “professional services,” as is defined in Section 2778 of the Labor Code. Professional services falls within any of the following three categories: (1) travel agent services provided within the definition of the relevant statutes, (2) administrators of human resources, provided that the work is predominantly intellectual and varied in character and cannot be standardized, and (3) marketing, provided that the work is original and creative and results in work that depends primarily on invention, imagination or talent. The determination of whether the individual is an employee or independent contractor is governed by Borello if the hiring entity can demonstrate that six requirements are satisfied:
Individual maintains a business location, which may be their residence, that is separate from the hiring entity. Individual, however, is not prohibited from choosing to perform services at the location of the hiring entity.
If work is performed more than 6 months after September 4, 2020, and the work is performed in a jurisdiction where individuals must have a business license or tax registration, the individual has the required license or tax registration, and any other required professional licenses or permits.
Individual is able to set or negotiate their own rates for services performed.
Individual is able to set their own hours, outside of project completion dates and reasonable business hours.
Individual is customarily engaged in the same type of work performed under the contract with another hiring entity or hold themselves to be available to perform the same type of work to other potential customers.
Individual customarily and regularly exercises discretion and independent judgement in the performance of the services.
If all six of these factors are met, the determination of employee or independent contractor status is governed by the Borello test. California Labor Code Section 2778 identifies 15 subcategories of occupations that fall within the definition of “professional services.”
Other New Exemptions
The other new exemptions provided in A.B. 2257 have their own unique statutory requirements for determining the proper classification of an individual.
Retroactivity
The new law states that “[i]nsofar as the application of Section[s] 2776 to [] 2784 [of the Labor Code] would relieve an employer from liability, those sections shall apply retroactively to existing claims and actions to the maximum extent permitted by law.” This is helpful for employers; if the new exceptions in A.B. 2257 would relieve an employer from liability for an existing claim or action, this new law would apply retroactively to that claim or action.
If a hiring entity can demonstrate compliance with all of conditions set forth anywhere in the new Labor Code Sections 2776 to 2784, inclusive, then Section 2775 and the holding in Dynamex do not apply to that entity, and instead the determination of an individual’s employment status as an employee or independent contractor shall be governed by Borello.
Tax Implications
There are certain sections of the Revenue and Taxation Code that base their determination of whether an individual is classified as an employee on the revised ABC test exemptions listed in A.B. 2257.
Additional Enforcement
State and city attorneys are now listed with the California Attorney General as the enforcer of these requirements. A district attorney is now authorized to prosecute employee classification cases for injunctive relief. City attorneys are able to enforce these cases if they are in a city having a population in excess of 750,000, or by a city attorney in a city and county; city prosecutors in cities with a full-time city prosecutor in the name of the people of the State of California can bring a case forward if they have the consent of a district attorney. This is likely to lead to an increase in employee classification cases.
This bill immediately went into effect when it was signed by the Governor of California on September 4, 2020. While the California Attorney General has already begun enforcing these requirements against some employers, it is not clear when district attorneys will begin using their discretion to enforce these laws.
While you may have mastered your ABCs in school, navigating California’s ABC test and its many exemptions is a bit trickier. To help you avoid improper classifications in your business, attorneys at PKWH are available to guide you.