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AB 2257 – Amends, Clarifies, And Expands Exemptions To AB 5’s “ABC Test” For Determining Independent Contractor Status (Urgency Bill Effective Immediately On September 4, 2020)
In 2018, the California Supreme Court issued its decision in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903 (Dynamex), and applied a stricter “ABC” test for determining the status of an independent contractor under the Wage Orders. In response, the Legislature passed AB 5 last year (effective January 1, 2020) to codify this new “ABC” test in the Labor Code and Unemployment Insurance Code for purposes of employment, workers’ compensation coverage, and eligibility for unemployment insurance benefits. AB 5 also included a number of exceptions to the application of the “ABC” test for certain types of work that could then be governed by the older and more flexible multifactor standard established in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).
AB 2257 is clean-up legislation to AB 5, and amends certain exceptions to the “ABC” test, in addition to reorganizing its statutory structure in the Labor Code so it is easier to understand.
AB 2257 was designated an urgency bill, and so become effective immediately upon Governor Newsom signing it into law on September 4, 2020.
First, AB 2257 reorganized the provisions in the previous Labor Code Section 2750.3 that were added by AB 5 and separated them out into new Labor Code Sections 2775-2787.
AB 2257 also amended the “business-to-business” exemption to the “ABC” test that was a part of AB 5 to now expressly include public agencies – something that was unclear previously. This exemption allows contracting relationships between a “business service provider” providing contracted services to a “contracting business” to be governed under the Borello standards instead of the “ABC” Test. However, the amended language still does not list public agencies in the types of entities that can constitute a “business service provider.” Thus, there is still an open question whether the business-to-business exemption would apply in situations where one public agency provides services under contract to another.
AB 2257 also makes the following additional changes to some of the eligibility criteria for the “business service provider” exemption:
Currently, under AB 5, the business service provider must provide services directly to the contracting business rather than to customers. AB 2257 modifies this restriction to clarify that it does not apply if the business service provider’s employees are solely performing services under the name of the business service provider and the business service provider regularly contracts with other businesses.
Specifies that a contract with a business service provider must include the payment amount, rate of pay, and the due date for the payment.
Allows a residence to qualify as the separate business location of the business service provider.
Previously, AB 5 required that the business service provider “actually” contract with other businesses and provide similar services. AB 2257 changes this requirement to “can” contract with other businesses.
Clarifies that the business service provider may use proprietary materials of the contracting agency that are necessary to perform the services of the contract.
AB 2257 also amends the requirements for several other Borello exemptions AB 5 created for specific professions and occupations and created several additional occupation-specific Borello exemptions. For example, AB 2257 exempts individuals who provide underwriting inspections and other services for the insurance industry, a manufactured housing salesperson, people engaged by an international exchange visitor program, consulting services, animal services, competition judges, licensed landscape architects, specialized performers teaching master classes, registered professional foresters, real estate appraisers and home inspectors, videographers, photo editors, translators, feedback aggregators, and a variety of occupations in the music industry. It also no longer requires that freelance writers, photographers, and editors limit their work to no more than 35 submissions per year to each putative employer.
Finally, AB 2257 adds several cross-references to the amended “ABC” test to the statutes governing personal income tax and other employment-related taxes.
Even with this clean-up legislation, the application of the more stringent “ABC” test for independent contractors or whether one of the Borello exemptions may apply is a very fact-specific analysis. Employers should seek legal counsel to review this law as applied to determining whether an individual is an independent contractor or employee.
(AB 2257 repeals Section 2750.3 of the Labor Code, adds Sections 2775 through 2787 to the Labor Code, amends Sections 17020.12 and 23045.6 of the Revenue and Taxation Code, and adds Sections 18406, 21003.5, and 61001 to the Revenue and Taxation Code.)