California Changes the Law Governing Independent Contractors Again!

Independent Contractor Agreement

Last month, California amended its independent contractor law to classify more jobs and professions as exempt from the “ABC” test that was enacted on January 1, 2020.

Background

A Los Angeles trial court certified a class of drivers in 2014 who worked for Dynamex, a delivery service, who handled deliveries only for that company. They alleged they’d been misclassified as independent contractors but were in fact employees.

On appeal in 2018, the California Supreme Court issued, Dynamex Operations v. Superior Court, which concerned business owners across California by making it harder to classify workers as independent contractors. The Court found that Dynamex’s workers were allowed to hire others to make deliveries assigned by Dynamex. And when not making pickups or deliveries for Dynamex, drivers were permitted to make deliveries for another delivery company, including a driver’s own personal delivery business.

Drivers were usually hired for an indefinite period of time, but Dynamex retained the authority to terminate its agreement with any driver without cause, on three days’ notice. Dynamex also had the right, throughout the contract period, to control the number and nature of deliveries that it offered to its on-demand drivers.

The California Supreme Court held that in determining whether to classify workers as employees or as independent contractors for purposes of California’s wage orders, the “suffer or permit to work” standard set forth in the wage orders required a hiring entity asserting independent contractor status to establish each of the three factors of what is termed the “ABC Test” and show that a worker was free from its control, performing work outside the usual course of its business, and customarily engaged in independent work.

The “ABC” Test

A year later, the state legislature considered California bill AB 5, a bill that sought to codify the Dynamex decision and clarify how it would be applied to jobs in the state. The bill stated that an individual who is:

providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation, or business.

This is known as the “ABC” Test. Again, all workers are considered employees unless the company can show each of the following:

  1. That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. That the worker performs work that’s outside the usual course of the hiring entity’s business; and
  3. That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

Exceptions

The bill exempted certain occupations from the application of Dynamex and the ABC Test. These occupations include, among others:

  • Licensed insurance agents;
  • Certain licensed health care professionals;
  • Registered securities broker-dealers or investment advisers;
  • Direct sales salespersons;
  • Real estate licensees;
  • Commercial fishermen;
  • Workers providing licensed barber or cosmetology services; and
  • Others performing work under a contract for professional services, with another business entity, or a construction subcontractor.

It’s important to note that gig-economy workers weren’t specifically included in these exemptions.

Furthermore, if a court finds that the ABC Test can’t be applied to a particular context, then the determination of employee or independent contractor status is to be governed by the California Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989).

The Borello test stipulates that the primary factor for determining contractor status is whether “the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.”

Confusion over Assembly Bill (AB) 5

AB 5 was enacted in 2019. The objective of the legislation was to thwart any tax shortcuts by employers and to provide workers who should be classified as employees with healthcare, workers’ compensation, paid time off, and other benefits.

However, many employers and workers alike in Los Angeles and throughout California found the new law confusing. Some industries felt they were unreasonably targeted by the law and were seeking changes.

Some business owners across the state believed the law would result in adverse effects on businesses and freelancers in California, as to who could be hired and the amount of work they could do for a business while remaining classified as independent contractors. In effect, the bill sought to reduce the amount of work that could be performed by some freelancers and contractors without them being considered full-time employees.

What Changes Did Assembly Bill (AB) 2257 Make?

Governor Newsom signed the amendment into law on September 4, 2020. It became effective immediately. The recent legislation “tweaked” AB5 and clarified some of its provisions.

The new law expands the number of industries eligible for an exemption. In addition to the 50+ industries exempt under AB5, the new law exempts a set of typically freelance positions from another 15 industries, including independent contractors providing these types of services:

  • Recording arts;
  • Music;
  • Performing arts;
  • Document translation;
  • Copy editing and illustrations;
  • Landscape architecture;
  • Registered professional forestry
  • Real estate appraisals;
  • Home inspection services;
  • Insurance underwriting inspections, auditing, and risk management and loss control;
  • The sale of manufactured housing;
  • International and cultural exchange services;
  • Competition judging
  • Digital content and feedback aggregation; and
  • Master class performance.

What is the Business-to-Business Exception?

AB 2257 maintains the exemption for “bona fide business-to-business contracting relationships” where a contractor “acting as a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership or corporation contracts to provide services to another such business.”

AB 2257 modified AB 5’s business-to-business exception to now also apply where a “public agency or quasi-public corporation” has retained a contractor.

Arguably, it’s a small change for California businesses. The business-to-business exception continues to contain 12 specific requirements (found in § 2776 of the bill)—each of which must be satisfied. Therefore, many business-to-business independent contractor relationships may still be unable to take advantage of this exemption merely because they fail to meet even one of the dozen requirements.

The following 16 industries were listed in AB5 as eligible for the business-to-business exemption:

  • Graphic design;
  • Photography;
  • Tutoring;
  • Event planning;
  • Minor home repair;
  • Moving companies;
  • Home cleaning;
  • Errands;
  • Furniture assembly;
  • Animal services;
  • Dog walking;
  • Dog grooming;
  • Web design;
  • Picture hanging;
  • Pool cleaning; and
  • Landscape (yard) maintenance

The new law expanded the original list to include wedding planners, consultants, and captioning. Moreover, the new law covers many more referral agencies because it states that the types of referral agencies exempted “shall include, but are not limited to,” those specified industries listed in AB 2257.

With the latest amendment, about 75 professions or types of businesses are now exempt from the test for independent contracting—the “ABC” Test. As a result, business owners can apply the more liberal Borello test to determine if workers are employees or independent contractors. The changes make it easier for companies to classify these types of workers as independent contractors.

How Does this Work with the Department of Labor’s Proposed New Rule on Independent Contractor Classification?

Adding to the analysis is the fact that the U.S. Department of Labor proposed a new rule on independent contractor classification on September 22, 2020.

In this rulemaking, the Department proposes to:

  • Adopt an “economic reality” test to determine if a worker is an employee or an independent contractor. The test would ask if a worker is in business for themselves or is economically dependent on an employer for work;
  • Identify and explain two “core factors”: (i) the nature and degree of the worker’s control over the work; and (ii) the worker’s opportunity for profit or loss based on initiative and/or investment to help determine if a worker is economically dependent on another’s business or is in business for themselves;
  • Identify three other factors that may serve as additional “guideposts” in the analysis including: (i) the amount of skill required for the work; (ii) the degree of performance of the working relationship between the worker and the potential employer; and (iii) whether the work is part of an integrated unit of production; and
  • Advise that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

This proposed rule will have no impact on California’s AB 5, AB 2257 or other definitions of “independent contractor” under other federal or state laws.

Takeaway

Employers should review their positions in light of AB 2257 and determine if changes need to be made to ensure workers are properly classified.

For help in reviewing vendor agreements and in applying the “ABC” Test to determine if a contractor falls within the parameters of the new law, contact Eanet, PC online or (310) 997-4185. We can help your business with a thorough audit to determine whether any workers are subject to reclassification in light of the new laws in California.

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