A potential amendment to California’s AB 5 law is sitting on Governor Newsom’s desk. If enacted, the amendment will allow certain professions to be classified as independent contractors rather than employees, notwithstanding AB 5’s presumption of employment status. On August 31, the California legislature sent AB 2257 to Governor Newsom for his review and signature. Supporters of the bill expect Newsom to sign it into law next month, especially given AB 5’s perceived negative impact on the “gig” economy during the pandemic. If signed by the governor, the law will take effect immediately.
By way of brief reminder, AB 5 established a 3-part test, known as the “ABC” test, that is used to determine if workers are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission. Under the ABC test, a person providing labor or services for remuneration is 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 broad test places most workers in the employee classification. AB 5, however, enumerated a few limited exemptions for specified occupations and business relationships from the application of the ABC test, providing that the exempt relationships are governed by the pre-AB 5 multi-factor test set out in S. G. Borello & Sons, Inc. v. Department of Industrial Relations. (For more detail on AB 5, click here.)
AB 2257 will modify some of the current exceptions to AB 5, and create new exceptions to AB 5’s presumption that workers are employees. A close read of the bill’s text is necessary given the proposed amendments’ nuances and sometimes conflicting detail. We outline below some of the major changes contemplated by AB 2257, but if your business potentially falls into one of the enumerated exceptions, we strongly recommend consulting with employment counsel given the complexities involved.
If enacted into law, AB 2257 will allow the following professionals to be classified as independent contractors in California if they satisfy the Borello standard.
- Recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians engaged in creating sound recordings, vocalists, photographers working on album covers, and other press and publicity photos relating to recordings, and independent radio promoters;
- Musicians or musical groups for the purpose of a single-engagement live performance event (unless certain conditions are met);
- An individual performance artist;
- Subcontractors in the construction industry;
- Individuals providing feedback to data aggregators;
- Persons who provide underwriting inspections, premium audits, risk management or loss-control work for the insurance industry;
- Licensed landscape architects;
- Registered professional foresters;
- Fine artists, freelance writers and translators;
- Manufactured housing salespersons;
- Real estate appraisers and home inspectors (if the appraisers/inspectors work under a contract for “professional services” and the hiring entity demonstrates that all of certain conditions are met);
- Persons engaged in conducting international and cultural exchange visitor programs;
- Competition judges with specialized skill sets (includes, but is not limited to, an amateur umpire or referee);
- Digital content aggregators who serve as licensing intermediaries for digital content; and
- Specialized performer hired to teach a master class for no more than one week.
The bill provides that the employment/contractor status of workers for some of these occupations may be established in a collective bargaining agreement.
AB 5 included a convoluted so-called “business-to-business” exception. The bill attempts to clarify the exception and make it (relatively) easier to meet. For instance, AB 5 includes the requirement that “the business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.” AB 2257 amends this as follows: “The business service provider can contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.” Accordingly, if the bill passes, this change will allow for more flexibility in the application of the exception – a contractor need not actually have a contract with other businesses, it need only have the opportunity for such contracts.
AB 5 created an exception for “referral agencies,” subject to a lengthy and complicated, multi-factor test. The bill revises the criteria pursuant to which referral agencies and service providers providing services to clients through referral agencies are exempt and revises applicable definitions. It expands the types of services that can utilize the referral agency exception to include consulting, youth sports coaching, caddying, wedding planning, services provided by wedding and event vendors and interpreting and interpreting services by a service provider certified by one of several specified agencies. The bill uses the phrase “including but not limited to” to determine coverage, potentially significantly broadening the scope of this exception to also include services not specifically listed.
The bill also lists a handful of services that expressly do not qualify. Those services are: high-hazard industry services, janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction services other than minor home repair.
There are additional changes that may widen the referral agency exception to more business platforms.
The proposed changes to AB 5 are detailed and complex. While we will monitor AB 2257 and share the latest developments, please contact your Baker McKenzie employment lawyer for assistance in determining whether your business falls into any coverage exceptions.