On Sept. 4, 2020, Gov. Gavin Newsom signed AB 2257, which — effective immediately and applicable to work performed since Jan. 1 — revises the rules under which a hiring entity may classify a worker as an independent contractor. The new law repeals and replaces AB 5, which, like the new measure, was authored by San Diego Assembly member Lorena Gonzalez.
Here are some things the new law didn’t change and key things it did.
ABC test unchanged
AB 2257 retains the ABC independent contractor test, first adopted by the California Supreme Court in its landmark 2018 Dynamex ruling, and continues to apply that test to a broad range of labor laws. Under the ABC test, a worker is an employee unless the hiring entity shows the worker: (A) works relatively free of the hiring entity’s control; (B) performs work beyond the “usual course of the hiring entity’s business” (usually the toughest part of the test); and (C) is engaged in an independent trade, occupation, or business similar to the work performed.
The new law continues to apply a more flexible test drawn from the California Supreme Court’s 1989 Borello ruling to licensed California lawyers, architects, engineers, private investigators, and ants. Certain licensed medical professionals and credentialed securities broker-dealers and investment advisors also continue to be exempt from the ABC test.
Here’s what’s new.
Business-to-business exception
AB 5 limited the business-to-business exception to sole proprietors and business entities that provided services “directly to the contracting business rather than to customers of the contracting business,” among the 12 criteria the contracting entity had to satisfy.
AB 2257 retains the 12 mandatory criteria, but extends the exception for service providers: (1) whose employees solely provide services to the customers of the contracting entity under the name of the service provider; and (2) that regularly contract with other businesses (so no exclusive arrangements).
But the business-to-business exception continues to be inapplicable to an individual who is not acting as a sole proprietor or formed as a business entity. Becoming a sole proprietor without employees is simple: (1) pick a name and, if not your own name, it with the county recorder; and (2) comply with license, permit, and zoning rules.
Referral agency exception
AB 2257, like AB 5, requires that a service provider connected to clients by a referral agency act as either a sole proprietor or a business entity for the relationship to be exempt from the ABC test. The new measure also continues to require the referral agency to meet about a dozen criteria to classify a service provider as an independent contractor.
Service providers now also must certify to the referral agency that they have the required business and professional licenses, permits and registrations. The referral agency must keep such certifications for three years.
AB 5 defined “referral agency” as a business that connects clients with 16 distinct services, including tutoring, minor home repair, dog walking, and web design. AB 2257 says that services that qualify for this exception “include, but are not limited to,” most of those in AB 5 plus consulting, youth sports coaching, caddying, wedding-related services and vendors, and interpreters. Home cleaning services was dropped, but may be saved by the statement in AB 2257 that the list of services is not all-inclusive.
AB 2257 also revised AB 5’s pre-COVID-19 definition of “tutor.” “Tutor” now means “a person who develops and teaches their own curriculum, teaches curriculum that is proprietarily and privately developed, or provides private instruction or supplemental academic enrichment services by using their own teaching methodology or techniques.” AB 5 excluded from the definition of tutor “a person who teaches a curriculum created by a public school.”
Professional services exception
AB 5 contained a “professional services” exception that applied the Borello test to providers of specified professional services if the hiring entity could show the individual met six criteria, including maintaining a separate business location, which could be the individual’s residence, unless the individual chose to work at the hiring entity’s location; and the individual was customarily engaged in the same type of work with another hiring entity or publicly made their services available to others.
The specified service providers included marketing professionals, human resources s, still photographers and photojournalists, and freelance writers. Photojournalists and freelance writers could not be classified as independent contractors if they provided more than 35 submissions per year.
AB 2257 removed the cap on submissions for still photographers, photojournalists, and videographers who: (1) work under a written contract that specifies how much and when they will be paid: (2) do not replace employees who performed the same kind of work at the same volume for the hiring entity; (3) do not primarily perform work at the hiring entity’s location, even as a matter of choice; and (4) are not restricted from working for other hiring entities. The same conditions apply to freelance writers and translators, except the written contract also must specify the intellectual property rights in the worker’s output.
Musician exception
AB 2257 specifies that the ABC test does not apply to a range of musical professionals. Recording artists, musicians, and vocalists working on sound recordings who receive no royalties from the sales of the recordings, however, must be paid at least the minimum and overtime pay for hours worked during the engagement as if they were employees.
A separate provision generally excepts from the ABC test a musician or musical group for the purpose of all but the largest single-engagement live performance events. Also excepted under a separate subpart are stand-up comics and stage magicians.
Assembly member Gonzalez has announced there will be a webinar on the new law in the coming weeks.
Dan Eaton is a partner with the San Diego law firm of Seltzer Caplan McMahon Vitek where his practice focuses on defending and advising employers. He also is an instructor at the San Diego State University Fowler College of Business where he teaches classes in business ethics and employment law. He may be reached at [email protected]. His Twitter handle is @DanEatonlaw
