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California Changes Its Independent Contractor Law – Again! – September 16, 2020

Teresa R. Tracyby Teresa R. Tracy

AB 5, the controversial California landmark legislation that dramatically changed the landscape of independent contractor versus employee status, has barely been in place since it became effective January 1, 2020.  It was followed by much gnashing of teeth by both businesses and many independent contractors who found their relationships altered in ways neither wanted, many lawsuits, and a threat by two major ridesharing companies to cease operations in California in the midst of a pandemic.

AB 2257 was rushed through the state legislature in record time, signed by the Governor, and became effective immediately as an emergency measure on September 4, 2020.  While it addresses some of the issues, it left largely intact the basic framework of AB 5 and most of its glaring problems, including retaining the restrictive “ABC test” as the default standard for classification.

Insofar as the application of the existing and/or expanded exemptions would relieve an employer from liability, the changes are retroactive to existing claims and actions to the maximum extent permitted by law.   If a hiring entity can prove that it meets all of the requirements of an exemption, whether pre-existing or new, then it still must meet the Borello test.  Labor Code section 2785.

The new law did not affect that status or test used to determine the status of such major occupations as food delivery workers, or ride sharing workers, franchising, trucking, and the motion picture and television industries.  Nor did it create new exemptions for such commonly used workers as house cleaning or gardening workers.

The law in this area remains in flux, there are many remaining gray areas, and the statute is both detailed, vague, and complicated.  Our employment attorneys are here to help navigate you through the morass.

Here’s a summary of what changed:

1. Business-to-business exemption: New Labor Code section 2776 expands this exemption to apply to a “public agency or quasi-public corporation” that retains a contractor.  The prior factors for determining the application of this exemption for all contracting businesses remain unchanged except that now:

(a) The requirement that the business service provider be providing services directly to the contracting business rather than to customers of the contracting business 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.

(b) The contract between the business service provider and the contracting business not only has to be in writing, but it must 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;

(c) It allows the business location of the business service provider to be the business provider’s residence;

(d) It now only requires that the business service provider can contract with other businesses to provide the kind of services and maintain a clientele without restrictions from the hiring entity, and no longer requires the contracting agency to prove that the business service provider actually contracts with others;

(e) Consistent with the nature of the work, it carves out any proprietary materials that may be necessary to perform the services under the contract from the tools, vehicles and equipment that the business service provider must provide on its own to perform the services.

When two bona fide businesses are contracting with one another under the conditions of the business-to-business exemption, the determination of whether an individual worker who is not acting as a sole proprietor or formed as a business entity, is an employee or independent contractor of the business service provider is governed by Labor Code section 2775 (i.e., under the ABC Test, an express state law or regulation, Dynamex, or Borello, as specified in that section.

2. Referral agency exemption: New Labor Code section 2777 both expands the kinds of referrals for service that qualify for this exemption, and eliminates some that were in the prior law.  It also imposes a number of new requirements under certain circumstances. It expressly provides that the ABC test governs “the determination of whether an individual worker is an employee” of the contractor referred to provide services, or an employee of the client to which the contractor was referred. A summary of the changes are:

(a) It clarifies that an individual can act as a sole proprietor and qualify for this exemption;

(b) It requires that the service provider must certify to the referral agency that the provider has any required business license or business tax registration, and the referral agency must keep this certification for at least three years. It further defines the terms “business license” and “local jurisdiction;”

(c) It requires the service provider to certify to the referral agency that the provider has any applicable professional licensure, permit, certification, or registration administered or recognized by the state available for the type of work being performed for the client, and the referral agency must keep this certification for at least three years;

(d) The service provider delivers services to the client under the service provider’s name, without being required to deliver the services under the name of the referral agency;

(e) It allows the service provider to be currently customarily engaged in an independently established business or trade of the same nature as, or related to, the work performed for the client, to have been previously engaged in such a business or trade;

(f) The referral agency may not restrict the service provider from maintaining an independent clientele, but does not require to referral agency to prove that the service provider actually does so;

(g) The service provider can be shown to have negotiated its hours and terms of work directly with the client, as well as the possibility that the service provider actually set its own hours and terms of work directly with the client;

(h) In addition to the possibility of establishing that the service provider actually sets its own rates, the referral agency can also show that the service provider negotiated rates with the client through the referral agency, negotiated rates directly with the client, or was free to accept or reject rates set by the client.

(i) The definition of “client” for the purpose of this exemption has been expanded to include a business that uses a referral agency to contract for services from a service provider that are otherwise not provided on a regular basis by employees at the client’s business location, or to contract for services that are outside of the client’s usual course of business. It is the responsibility of a business that uses a referral agency to meet the conditions of this exemption;

(j) The definition of “referral agency” has been modified a bit to clarify that it is a business that provides clients with referrals for service providers to provide services under a contract. The definition of “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.

(k) The scope of services for which referrals can be made for the purpose of meeting this exemption have changed. They now include, but are not limited to, graphic design, web design, photograph, 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 and grooming, picture hanging, pool and yard cleanup, and interpreting services.  They specifically exclude services provided in an industry designated by OSHA or  DIR as a high hazard industry 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.  Many of these terms are further defined in the new law;

(l) A “referral agency contract” is defined as the agency’s contract with clients and service providers governing the use of its intermediary services; 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. The contract may include fees to be paid by the client for utilizing the referral agency; the fee cannot be deducted from the rate set or negotiated by the service provider.

3. Professional services exemption: This exemption, now contained in new Labor Code section 2778, underwent significant expansion.  The identified professional services are not covered by the ABC test or Dynamex, but the status of these positions continues to be governed by the Borello   This exemption now applies, in addition to previously identified services, to certain still photographers; photojournalists, videographers, photo editors, digital content aggregators; translators, copy editors,  illustrators; content contributors, advisors, producers, narrators, cartographers provided they do not displace existing employees); specialized performers hired to teach a class for no more than a week; appraisers; and registered professional foresters.  Furthermore, certain positions that are subject to the Business and Professions Code continue to be governed by that Code, Unemployment Code section 650, Labor Code sections 3200, or Borello, as specified in the new section.  The new law eliminates the submission cap that existed under prior law and instead requires that various individuals working in various types of occupations do not displace existing employees.

4. Certain single engagement events: New Labor Code section 2779 specifies that, under certain circumstances, the relationship between two individuals, wherein each individual is acting as a sole proprietor or separate business entity pursuant to a contract to provide services at a single-engagement event, are not covered by the ABC test or   Specifically excluded from this exemption are high hazard services, janitorial delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction services other than minor home repair.

5. Music, film, and other entertainment: A major exemption was added in new Labor Code section 2780, covering a wide variety of music, film, performing artists, theatrical workers, and other entertainment positions, which must meet certain criteria and may nevertheless still be covered by the Borello test, and an applicable collective bargaining agreement.

6. Construction: New Labor Code section 2781 largely retains pre-existing provisions relating to construction and construction trucking services.

7. Data aggregators: New Labor Code section 2782 more specifically excludes data aggregators (i.e., 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) from the ABC test and Dynamex, although to prove independent contractor status the person using the service must meet the Borello test and specific statutory requirements.

8. Certain specific occupations: New Labor Code section 2783 continues to specify certain licensed professionals (e.g., doctors, dentists, psychologists, veterinarians, attorneys, securities broker-dealer and investment advisors, and direct sales salespersons) to which the Borello test continues to apply, and has expanded the list to include persons who provide underwriting inspections, premium audits, risk management, loss control work for the insurance and financial service industries, as well as certain manufactured housing salespersons.  It also expanded the list to include certain newspaper distributors and carriers, those engaged in an international exchange visitor program, and competition judges.

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This article is made available for educational purposes and to provide general information on current legal topics, not to provide specific legal advice. The publication of this article does not create any attorney-client relationship and should not be used as a substitute for competent legal advice from a licensed professional attorney.

Please feel free to reach out to any attorney in our Labor & Employment Practice Group with any questions.

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