Independent Contractor Or Employee? AB 2257 Modifies AB 5, California’s Landmark Law Regarding Worker Classification

By Swerdlow Florence Sanchez Swerdlow & Wimmer

September 22, 2020

On September 4, 2020, California Governor Gavin Newsom signed Assembly Bill 2257, which significantly expands and modifies the list of occupations and industries exempt from the default “ABC Test” for determining a worker’s classification. AB 5, which was passed in 2019 and became effective on January 1, 2020, upended the law regarding worker classification in California by establishing the “ABC Test” to determine whether a worker should be classified as an employee or independent contractor for purposes of the California Labor Code, Unemployment Insurance Code, and Wage Orders. Under the ABC Test, a worker is presumed to be an employee, rather than an independent contractor, unless the hiring entity can demonstrate all of the following conditions are met: (A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work; (B) the worker 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.

AB 5 specified, however, that certain occupations and industries were exempt from the ABC Test – provided certain conditions were met – and that the classification for such workers would, instead, be determined by the multi-factor test set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989) (the “Borello test”). The Borello test is much more flexible than the ABC Test and provides more opportunity for a worker to qualify as an independent contractor. The original exemptions in AB 5, subject to certain conditions, included: licensed professionals (including architects, engineers, hairstylists, estheticians); doctors; financial services professionals (including accountants, investment advisors, insurance brokers); real estate agents; and professional services (including marketing positions, human resources administrators, graphic designers, grant writers, and fine artists). Also exempt under AB 5 were freelance writers, photographers, editors, photojournalists, and newspaper cartoonists, provided that the worker supplied a maximum of 35 submissions to an outlet in a year.

Following the enactment of AB 5, many industries began to question why they were excluded from the list of exemptions and lobbied for their own exemptions in additional legislation.

AB 2257 repeals former California Labor Code section 2750.3, which contained AB 5, and creates new Labor Code sections starting with Section 2775. AB 2257 is effective immediately and, therefore, California employers should ensure that they are complying with this updated legislation. This E-Alert provides a brief recap of the expanded exemptions and modifications to AB 5.

Additional Exemptions To ABC Test

AB 2257 expanded the list of exemptions for which the Borello test could be used, instead of the ABC Test, if certain conditions are satisfied. This expanded list includes:

•    Recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers and mixers engaged in the creation of sound recordings, musicians engaged in the creation of sound recordings, vocalists, photographers working on recording photo shoots, album covers, and other press and publicity purposes, independent radio promoters, and any other individual engaged to render any creative, production, marketing, or independent music publicist services related primarily to the creation, marketing, promotion, or distribution of sound recordings or musical compositions;
•    Musicians or musical groups for the purpose of a single-engagement live performance.
•    An individual performance artist performing material that is their original work and creative in character and the result of which depends primarily on the individual’s invention, imagination, or talent;
•    A specialized performer hired by a performing arts company or organization to teach a master class for no more than one week;
•    Licensed landscape architects;
•    Translators, copy editors, and illustrators;
•    Content contributors, advisors, producers, narrators, and cartographers for a journal, book, periodical, evaluation, other publication or education, academic, or instructional work in any format or media;
•    Real estate appraisers;
•    Home inspectors;
•    A person who provides underwriting inspections, premium audits, risk management, or loss control work for the insurance and financial services industries;
•    Manufactured housing salespersons;
•    A competition judge with a specialized skill set or expertise (including an amateur umpire or referee);
•    Persons engaged in conducting international and cultural exchange visitor programs; and
•    An individual providing feedback to a data aggregator.

In addition, AB 2257 eliminates AB 5’s cap on submissions that freelance writers, photographers, editors, photojournalists, and newspaper cartoonists could provide to a media outlet per year. Instead, AB 2257 requires that the individual not directly replace an employee who performed the same work at the same volume for a hiring entity.

Business-To-Business Exemption

AB 2257 maintains the “business-to-business” exemption for individuals acting as sole proprietors (or through a business entity) to provide services to another company. AB 2257 clarifies that to qualify for the exemption, the business service provider must provide services directly to the contracting business rather than to the customers of the contracting business. Under AB 2257, the contract for a business service provider must include the payment amount, rate of pay, and due date for the payment. AB 2257 also allows for a home or residence to qualify as the separate business location for a business service provider. A significant change is that, while AB 5 stated that the business service provider must actually contract with other businesses to provide similar services, AB 2257 provides that a business service provider merely “can” contract with other businesses. Lastly, AB 2257 states that the business service provider may use propriety materials of the contracting business if such materials are necessary to perform the services under the contract.

Referral Agencies

AB 5 created the “referral agency” exemption for individuals acting as sole proprietors (or through a business entity) to provide services to clients through a referral agency. AB 2257 expands the list of service providers to include consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors, and interpreting services (although the full list is non-exhaustive). AB 2257 provides that the following high-hazard industry services do not qualify for the exception: janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, and in-home care services, as well as construction services other than minor home repair.

Next Steps

Businesses who classify any workers as independent contractors should review such classifications to ensure compliance with AB 2257. This area of law continues to evolve, and application of the changed definitions and exemptions as well as their nuances can be very complicated. Additionally, industries falling under any new exemptions in AB 2257 may wish to consider whether workers may now be classified as independent contractors. Contact your SFSS&W attorney if you have any questions about AB 2257 or about worker classification generally.