WARNING: More Changes to AB 5 Independent Contractor Law

On September 4, 2020, California Governor Gavin Newsom signed into law AB 2257, which provides some further clarifications and expands the exemptions available under California’s AB 5 regarding independent contractors. The amended statute, which will take effect immediately, will benefit some businesses in California, while leaving others wishing for more exemptions and more clarity from California’s legislators.

How Did We Get Here?

In 2018, the California Supreme Court adopted the three part “ABC test” for determining whether an individual is an employee or independent contractor under California law in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903, 416 P.3d 1 (2018).  The High Court in large part replaced the multi-factor test it had created in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341, 796 P.2d 399 (1989), which California businesses had relied on for nearly 30 years.  The Borello test looked at a number of factors to determine the degree of control that a hiring entity had over its workers.  But in adopting the “ABC test” in Dynamex, the Court instead created a presumption that a worker is an employee unless the following three factors are met:

1. The individual is free from the employer’s control and direction;
2. The individual performs work that is outside the usual course of the employer’s business; and
3. The individual customarily engages in an independently established trade, occupation, profession, or business of the same nature as that involved in the work performed.

In 2019, the California Legislature set out to codify and clarify the “ABC test” adopted in Dynamex by passing AB 5. Among other things, AB 5 clarified that the application of the “ABC test” used to determine whether an individual is an employee or independent contractor was not limited to the Wage Order context that had been at issue in Dynamex, but was also applicable to determinations under the  Workers’ Compensation laws, the Unemployment Insurance Code, and the California Labor Code.

Exceptions to AB 5

AB 5 also made clear that the Borello factors remain applicable to several exemptions enumerated in AB 5. These exemptions fall into seven categories:

1. Specific occupations –occupations like insurance agents, certain medical professionals, lawyers, architects, engineers, private investigators, accountants, securities broker-dealers, investment advisors, direct sales salespersons, commercial fishermen, and newspaper carriers working under contract with a newspaper publisher ae specifically exempted;
2. Contracts for professional services between a hiring entity and an individual providing professional services;
3. Real estate licensees and repossession agencies;
4. Relationships between certain kinds of businesses;
5. Relationships between a contractor and subcontractor in the construction industry;
6. Relationship between a referral agency and a service provider that uses the referral agency to connect with clients; and
7. “Motor club” services

These exemptions are not as straightforward as the foregoing list may make them appear.  Each contains specific requirements that must be met before they will apply, and this has often led to confusion about whether a particular exception does in fact apply to certain individuals. It has also created controversy since some businesses were specifically exempted from AB 5 while others were not.

In an effort to remedy these problems, some businesses have initiated lawsuits challenging AB 5, including businesses in the gig economy and the California Trucking Association. In January 2020, trucking companies were granted an injunction that prevented AB 5 from being enforced in their industry. More recently, a California trial court judge ruled that rideshare companies Uber and Lyft must classify their drivers as employees, though the California appeals court later stayed the order after the companies threatened to stop operating in California.

Still, other companies have engaged in extensive lobbying efforts to try to have an exemption created for their businesses. By February 2020, there were over 34 different bills in the Legislature seeking to clarify, repeal and/or grant additional exemptions under AB 5.

Finally, several prominent gig economy companies, Lyft, DoorDash, Instacart, and Postmates, have succeeded in having an initiative placed on the November 2020 California ballot. Proposition 22 would declare app-based drivers exempt from AB 5 and deem them independent contractors (subject to compensation and safety conditions).

AB 2257

Against this backdrop, in late August 2020, the California Legislature passed AB 2257, which reaffirms that the “ABC test” remains the standard for independent contractor classification and provides new statutory exemptions and clarifications of previous exemptions to AB 5. The highlights include the following:

• Business-to-Business Contracting.
  • Clarifies that a business contracted to provide services to another business’s customers can do so when the services are performed by the business service provider’s employees under their employer’s name, provided that other criteria under the section are satisfied.
  • Also clarifies that a contracting business under this section includes public agencies and quasi-public corporations.
• Referral Agency Contracts with Businesses.
  • Clarifies that the types of services covered by the referral agency exemption now includes youth sports coaching, interpreting services, and consulting services.
  • Excludes services that are designated by Cal/OSHA as “high-hazard” industries, including janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, and construction services other than minor home repair.
• Writers and Multimedia Professions.
  • Removes the existing requirement for the “ABC test” to apply after a freelance writer, still photographer, photojournalist, or editor has provided more than 35 content submissions to a single hiring entity.
  • Requires a hiring entity to demonstrate that a freelance writer, translator, illustrator, editor, copy editor, or other type of content contributor fulfills the Borello factors.  
• “Single Engagement” Business-to-Business Exemption.
  • Creates an exemption from AB 5 for individual businesspersons who contract with one another “for purposes of providing services at the location of a single-engagement event,” provided that the contracting parties are not subjecting one another to control and direction and otherwise operate their businesses independently.
• Music Industry & Performer Exemptions.
  • Exempts certain occupations from the “ABC test”, including recording artists, songwriters, composers, sound mixers, record producers and directors, and other professionals involved in the creation, marketing, promotion, or distribution of a sound recording or musical composition.
  • Allows independent musicians whose work is self-directed to collaborate with one another during a single-engagement live performance without being governed by the “ABC test” so long as the following do not apply: (a) perform as a symphony orchestra, or in a musical theater production, or at a theme park or amusement park; (b) are an event headliner in a venue with more than 1,500 attendees; or (c) performs at a festival that sells more than 18,000 tickets per day.
• Professionals in Performing Arts. Clarifies that when an individual performance artist sets the terms of their work, retain the intellectual property rights, and have the full artistic control, the employment classification is governed by the Borello test. 
• Data Aggregators. Clarifies that individuals who are providing feedback to businesses, research institutions, and other organizations that request and aggregate such feedback, the Borello test controls.
• Other Industry Specific Provisions. Adds additional clarifications for hiring entities by setting forth various industries that are governed by the Borello test, including: individuals providing underwriting inspections, premium audits, risk management, or loss control work for the insurance and financial service industries, appraisal services, home inspector, or manufactured housing salesperson, professional forester, international exchange visitor, and competition judges.
• Public Enforcement. Clarifies that district attorneys are among the public entities that have the authority to enforce AB 5 by seeking injunctive relief to “stop the exploitation of misclassified workers.”

What Should Businesses in California Do Now?

Businesses using independent contractors should again evaluate whether they are doing so in compliance with AB 5, as amended by AB 2257. Failure to comply with amended AB 5 may result in significant liability, as well as substantial civil penalties.

For companies not exempted from the “ABC test” by amended AB 5, the lobbying, lawsuit, and ballot initiative options remain available, though there are upsides and downsides to each. For businesses operating in California with questions concerning independent contractor classification in the wake of amended AB 5, Arent Fox will continue to be available to provide advice and counsel on how best to comply with that statute.