New California Law Excludes Some Industries from "ABC" Test for Independent Contractors

On the eve of the Labor Day weekend, California Gov. Gavin Newsom signed Assembly Bill (AB) 2257 into law. The new law, which takes effect immediately, modifies the recently enacted AB 5. As Holland & Knight previously covered, AB 5 marked a sea change in how employees and independent contractors are classified under California law. (See Holland & Knight's previous alert, "New California Law Codifies – and Expands – Strict ABC Test for Independent Contractor Status," Sept. 25, 2019.) AB 5's strict "ABC" test effectively precluded many industries that traditionally relied on independent contractors from utilizing contractors, instead requiring that traditional contractors be classified as employees.

Under AB 5, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

A. that the worker 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. that the worker performs work that is outside the usual course of the hiring entity's business

C. that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed

While Condition A is reminiscent of the primary right-to-control test under certain formerly controlling case law, the B and C conditions make it significantly more difficult to classify workers as independent contractors.

AB 2257's Recasting of AB 5's Coverage

There are numerous well-documented examples of industries impacted by AB 5's functional preclusion on entities retaining independent contractors, including news/journalism and online content providers, musicians and artists, consultant services, transportation services and many other services in the so-called "gig" economy, where putative contractors work on a self-governed basis, frequently when and where they desire. AB 2257 aims to limit the sizable impacts of AB 5 on a number of these professions and industries by specifically excluding certain of them from analysis under the ABC test.

As modified by AB 2257, new professions added as exemptions from the ABC test include:

• fine artists, freelance writers, translators, editors, advisors, producers, copy editors, illustrators
• insurance underwriters
• those providing professional consulting services
• certain occupations involved with creating, marketing, promoting, or distributing sound recordings or musical compositions
• musicians for the purpose of a single-engagement live performance event and other performance artists
• a modified exemption for photographers, photojournalists, videographers and photo editors working under contract, as well as a new exemption for content aggregators
• real estate appraisers and home inspectors

The law also creates a new exemption for business-to-business relationships between two or more sole proprietors. This is a significant expansion of the previous, narrowly drawn business-to-business exemption, which required a physical business location for the services performed outside of  the hiring entity's location, among establishing 11 other conditions. AB 2257, however, notably does not make any accommodations for certain transportation and technology companies that serve as an interchange to connect drivers to passengers.

For the new positions exempted from the ABC test, determining whether a worker is a putative employee or contractor reverts to the multifactor test under existing law, as expressed in S.G. Borello & Sons, Inc. v. Dep't of Indus. Relations, 48 Cal. 3d 341 (1989). Under Borello, the primary test of an employment relationship, known as the "right to control" test, is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.

Conclusion and Considerations

Although AB 2257 is a significant modification to AB 5 and provides some relief to certain industries, AB 5 still remains a complex framework of exceptions, exemptions and qualifications. There is still the possibility of significant changes to AB 5 by way of referendum. In the interim, however, businesses that use independent contractors or contract with "gig economy" workers in California should closely review all independent contractor classifications and gig worker arrangements to assess the potential impact of AB 5, AB 2257 and the ABC test on operations, as well as to determine their next steps to avoid potential misclassification exposure going forward.

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Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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