California recently enacted AB2257, a statute to amend AB5, a law that was effective January 1, 2020 and made the ABC test the principal test for determining if a worker in California was an employee or independent contractor. The ABC test requires a business/hiring entity that wants to engage with a person who is an independent contractor show that:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
AB5 also created a number of exceptions including exceptions for certain professionals who were licensed with the state (such as doctors, lawyers, architects, or accountants), professionals who provided specific professional services (such as graphic designers, grant writers, some freelance writers, barbers, cosmetologist, etc.), and bona fide businesses (as defined in the statute).
After AB5, if a business wanted to hire independent professionals for whom there was no specific exception, the business had to try to meet the requirements of the bona fide business-to-business exception. One of the requirements of the bona fide business to business exception is that the person must provide services to the business and not to the client of the business. In some circumstances, this is relatively easy—for example, if an accounting firm hires a mover to move office furniture—but in other situations it was less clear.
After months of complaints about AB5, the legislature passed AB2257 to address some of the major complaints. AB2257 helps businesses that want to engage with independents in specific industries or performing particular services, but did little to improve the bona fide business-to-business exception.
AB2257 creates new exceptions for recording artists, songwriters, composers, record producers, musical engineers and mixers, vocalists, photographers working on recording photo shoots, radio promoters, and other individuals engaged in creating creative, marketing or independent music publicist services.
Bona Fide Business-to-Business Exception Remains Mostly Unchanged
The bona fide business-to-business exception is the exception available to independent contractors who do not neatly fit into any of AB5 or AB2257’s defined categories. AB2257 makes minor changes to bona fide the business-to-business exception, but it does not materially change the exception. The bona fide business-to-business exception in AB5 has twelve requirements that a business service provider must meet to be considered a bona fide business. One of the requirements open to interpretation is that the business service provider provides, “services directly to the contracting business rather than to customers of the contracting business”. This is a new requirement in AB5 and the statute does not provide guidance as to how it should be interpreted.
The requirement that the, “business service provider is providing services directly to the contracting business rather than to customers of the contracting business” is modified by AB2257 by saying the requirement doesn’t 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.”
This new clause appears to create three requirements:
- This business provider has employees. The language “the business service provider’s employees…” suggests that if the business service provider has more than one employee then this exception may be available to him or her. For this exception to require that an independent contractor have more than one employee means that his exception will not be available to independent contractors who do not have any employees.
- The services are performed under the name of the business service provider.
- The business service provider “regularly contracts with other businesses.” This seems to be a different requirement than “can contract with other businesses” which appears in other parts of the statute. A business service provider must regularly contract with other business instead of just being able to contract with other businesses. Many independent contractors work for one client at a time and would not be able to meet this requirement.
AB2257’s changes to the bona fide business to business exception may help in limited circumstances but does not provide any benefit to many independent professionals or the businesses that seek to engage with them. California continues to be unfriendly to independent professionals who want to provide professional services as independent contractor.
Even with the changes brought about by AB2257, AB5 makes it hard for companies to engage with many independent professionals. The ABC test codified by AB5 is the strictest test in the country for classifying workers as employees or independent contractors. In particular, the B prong—the requirement the work that is “outside the usual course of the hiring entity’s business”—prevents many qualified independent professionals from being able to engage with businesses.
For example, an independent professional who has 15 clients and a niche skill in the technology industry could not pass the test and work for any one of a number of technology companies in California because the services would not be considered “outside the usual course of the hiring entity’s business.” A better approach would be to distinguish between companies that classify lower paid workers as independent contractors to avoid payroll taxes, worker compensation, and other labor laws and companies that pay reasonable rates to highly skilled professionals as a way to acquire their skills and experience.