Seyfarth Synopsis: Businesses operating in California have had all of eight months to adapt since Assembly Bill 5 (“AB 5”), a landmark piece of legislation governing their relationships with independent contractors, took effect on January 1, 2020. Now, with the passage, executive signature, and immediate enactment of Assembly Bill 2257 (“AB 2257”), businesses must once again adapt to another drastic shift in the employee classification calculus.
On September 4, 2020, AB 2257, which substantially revises and clarifies California’s independent contractor laws, went into effect immediately upon receiving California Governor Gavin Newsom’s signature. AB 5, as businesses are all too aware, installed the “ABC Test” as the default standard for determining whether independent contractors should be treated as employees of a hiring entity, and also set forth a labyrinthine list of exemptions from its purview. From its inception, AB 5 has stirred an inordinate amount of controversy—not only have we written extensively on the measure, we also have our own tag dedicated exclusively to the issue. Our prior analysis of AB 5 can be accessed here. AB 2257, which preserves the ABC Test for independent contractor classification, expands the universe of available exemptions from this test. The new law will no doubt delight some businesses, frustrate others and confound anyone responsible for keeping track of the exemptions.
Background On AB 5
AB 5, which took effect on January 1, 2020, codified the ABC Test for employee status adopted in the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc. v. Superior Court. In Dynamex, the California Supreme Court held that in order to defeat claims arising under California’s Wage Orders premised on independent contractor misclassification, a defendant must prove that: (A) the worker is free from control and direction of the hiring entity in connection with performing the work, both under contract and in fact; (B) the worker performs work outside the usual course of the hiring entity’s business; and (C) the worker customarily engages in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
AB 5 expanded the reach of Dynamex by making the ABC Test the default test for all Labor Code, Unemployment Insurance Code and Wage Order claims. As a result, application of the ABC Test was extended to a host of additional causes of action to which it previously did not apply, such as, for instance, claims for failure to reimburse necessary business expenses and failure to provide accurate wage statements.
In addition to expanding the applicability of the ABC Test, AB 5 also provided for broad governmental enforcement powers. It enabled the Attorney General and certain city attorneys to pursue injunctions against businesses suspected of misclassifying independent contractors.
AB 5 also contained numerous statutory exemptions from the ABC Test. Provided certain criteria were met, the employment status of independent contractors in an occupation covered by one of these exemptions was determined by the common law test for employment (commonly known as the Borello test), a considerably more flexible standard than the ABC Test. The fact that some industries were expressly exempted while others were not, led to controversy, confusion, and requests from hiring entities and workers in dozens of industries for additional and clarifying legislation. As of February of this year, the Legislature introduced 34 stand-alone bills exempting certain industries. As those measures wound through the legislative process, they were, for the most part, distilled into AB 2257.
What’s New In AB 2257?
AB 2257 maintains the essential framework of AB 5. The ABC Test remains the default standard for independent contractor misclassification. However, as a result of swift and concerted lobbying efforts, a plethora of new statutory exemptions from the ABC Test, which apply retroactively where applicable, are now available. In addition, some of the existing exemptions have been altered in potentially significant ways.
- Business-To-Business Exemption: 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.” The exemption now also applies where a “public agency or quasi-public corporation” has retained a contractor. However, in addition to broadening the availability of the exemption, AB 2257 also extends the application of the ABC Test to individual workers retained by a contractor, with respect to their relationships with both the contractor and the hiring entity. In other words, the ABC Test will determine whether an individual worker retained by a contractor, and not directly by the hiring entity, is an employee of the hiring entity. While case law holds that the ABC Test does not apply where a worker has been classified as an employee, the unclear phrasing of the new business-to-business exemption could lead to litigation on this subject.
- “Single-Engagement” Business-To-Business Exemption: AB 2257 creates an exemption from the ABC Test for individual businesspersons who contract with one another “for purposes of providing services at the location of a single-engagement event.” Provided certain criteria are met (including a lack of control over the work, a written contract specifying payment amounts, and each individual’s maintenance of his or her own business location), the ABC Test will not apply where one individual contracts with another to perform services at “a stand-alone non-recurring event in a single location, or a series of events in the same location no more than once a week.”
- Referral Agency Exemption: AB 2257 also includes clarifications of the referral agency exemption, which may exempt from the ABC Test the relationship between an individual operating as a sole proprietor or a business entity and a business that refers that individual’s services to clients. For starters, AB 2257 expands the referral agency exemption significantly, expressly applying the exemption to a non-exclusive list of additional services, including consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors and interpreting services. Indeed, according to the Senate Committee on Labor and Employment analysis, the referral agency expansion was one of the most significant changes in AB 2257. In addition to expanding the scope of the exemption, AB 2257 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. As with the analogous clarification of the business-to-business exemption, this is a potentially significant addition in that it may lead to litigation over whether the ABC Test applies to workers who have been classified as employees.
- Professional Services Exemption: AB 2257 expands the already lengthy list of occupations that may qualify for an exemption from the ABC Test under the professional services exemption. The following occupations, in addition to those originally identified in AB 5, may be subject to the common law test for employment as a result of AB 2257: content contributors, advisors, producers, narrators or cartographers for certain publications (provided they do not displace existing employees); specialized performers hired to teach a class for no more than a week; appraisers; registered professional foresters; and home inspectors. AB 2257 also eliminates restrictions in AB 5 that threatened to upend the journalism industry. Whereas AB 5 limited the number of “submissions” independent contractors of various types, including still photographers and photojournalists, videographers, photo editors, freelance writers, translators, editors/copy editors and illustrators/newspaper cartoonists, could publish in a single forum without sacrificing their contractor status, AB 2257 removes the submission cap and instead requires that businesses refrain from displacing existing employees in order to utilize one of these types of contractors.
- Music Industry & Performer Exemptions: AB 2257 creates several exemptions for the entertainment industry, primarily in the music industry. First, the following occupations involved in creating, marketing, promoting or distributing sound recordings or musical compositions are exempt from the ABC Test: recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers and mixers, musicians, vocalists, photographers, independent radio promoters and certain types of publicists. Notably, however, musicians and vocalists who do not receive royalties from a sound recording or musical composition must be paid the applicable minimum and overtime wages, as though they were employees. Second, musicians and musical groups engaged for a single-engagement live performance event (i.e., a concert) are exempt from the ABC Test unless: (a) they 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) perform at a festival that sells more than 18,000 tickets per day. Finally, individual performance artists including comedians, improvisers, magicians and illusionists, mimes, spoken word performers, storytellers and puppeteers who perform original work they created will qualify for an exemption so long as they are free from the hirer’s control, retain the intellectual property rights related to their performance, set their terms of work and negotiate their rates.
- Miscellaneous Exemptions: Subject to certain requirements, AB 2257 adds exemptions for the following occupations: manufactured housing salespersons; certain individuals engaged by international exchange visitor programs; and competition judges (including amateur umpires and referees).
- Broader Governmental Enforcement Powers: AB 2257 provides district attorneys the ability to file an injunctive relief action against businesses suspected of misclassifying independent contractors. Previously, only the Attorney General and certain city attorneys possessed this power.
Which Industries Were Excluded From AB 2257?
AB 2257 does not include exemptions for a number of industries that have engaged in extensive lobbying efforts that pre-date even the passage of AB 5. Such industries include, among others, gig economy companies, franchising, trucking and the motion picture and television industries. The 2021-22 legislative session will undoubtedly see these, and other, industries lobbying for additional exemptions; the most immediate task for many in the business community, however, is understanding how AB 2257’s amendments affect their business relationships.
What Will Happen Next?
AB 2257 took effect immediately upon its passage, and is, accordingly, the law of the State of California. It is a given that some industries which did not secure an exemption will continue lobbying legislators. Others may choose to follow the lead of transportation platform companies, which are funding a ballot initiative (Proposition 22) to create a new class of workers applicable to drivers, if their efforts prove successful. Lawsuits currently pending and yet to be filed, including one previously filed by a trucking industry interest group, may yet impact the scope of AB 2257’s application. Finally, it remains to be seen whether governmental officials will avail themselves of the enforcement powers bestowed upon them, as the flood of such lawsuits predicted by many following the passage of AB 5 has not occurred.