California Passes Law Changing the Test for Independent Contractor Status for Certain Types of Workers

Topics: Court Decisions, New Laws & Legislation, Wage & Hour Issues

As the fallout from the California Supreme Court’s 2018 decision in Dynamex Operations West v. Superior Court continues to plague businesses, the California legislature continues to grapple with crafting legislative exceptions from the decision.  In the Dynamex case, the California Supreme Court overhauled the test for independent contractor status in California, greatly narrowing the types of employees who may lawfully qualify as independent contractors.  Since that decision (which makes no sense for many businesses or workers), business groups (and some worker groups) have been lobbying for legislative exceptions and/or for the decision simply to be overruled by statute.  Last year, the legislature passed AB 5, which was signed into law and created a pretty long list of exceptions for certain industries, but left others out and in some ways the exceptions were overly confusing and difficult to apply.  This year, the legislature tried again and passed AB 2257.  To be clear, AB 2257 retains the Dynamex test as the default test for determining independent contractor versus employee status in California.  However, it revises and expands exemptions from that test for certain industries.  This bill was signed into law by Governor Newsom on September 4, 2020 and took effect immediately as urgency legislation.  AB 2257 still falls far short of fixing the widespread problems and confusion created by Dynamex and AB 5, but here’s what it does for some select industries:

Business-to-Business Contracting Relationships

AB 5 had included an exception from Dynamex for situations where one business hires another business to perform services, provided some 12 criteria were met.  Those criteria were not practical.  AB 2257 revises the business-to-business exception but still manages to leave it a mess with a gaping hole in its coverage.  For some unknown reason, the exception does not say that business-to-business relationships qualify as valid independent contractor relationships if certain conditions are met.  Instead, the exception says that the independent contractor issue will be decided under Borello instead of Dynamex.  (Borello was the law in California prior to Dynamex and set forth its own, more flexible 12-factor test for determining whether a worker is an independent contractor or an employee.)  That would be easy enough to understand and apply.  Unfortunately, the Legislature did not stop there.  Instead, it said that business-to-business contracting relationships will be governed by Borello IF 12 factors are met (those 12 factors don’t necessarily align with Borello).  In other words, if you satisfy 12 factors, then you can have another 12-factor test applied to determine if you have a valid independent contractor relationship.  That’s not at all confusing.  In any event, here’s the revised exception:

If an individual acting as a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business or to a public agency or quasi-public corporation (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied:

1. The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
2. The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. This subparagraph does not 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.
3. The contract with the business service provider is in writing and specifies the payment amount, including any applicable rate of pay, for services to be performed, as well as the due date of payment for such services.
4. If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
5. The business service provider maintains a business location, which may include the business service provider’s residence, that is separate from the business or work location of the contracting business.
6. The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
7. 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.
8. The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
9. Consistent with the nature of the work, the business service provider provides its own tools, vehicles, and equipment to perform the services, not including any proprietary materials that may be necessary to perform the services under the contract.
10. The business service provider can negotiate its own rates.
11. Consistent with the nature of the work, the business service provider can set its own hours and location of work.
12. The business service provider is not performing the type of work for which a license from the Contractors’ State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

So, on the positive side, the exception was broadened to permit a business service provider to provide services to customers of the contracting business rather than solely to the contracting business.  Providing service to customers is ok now as long as the service is being provided in the name of the service provider and the service provider provides services to other businesses as well.  The business-to-business exception was also broadened to make clear that businesses that provide services to another business need not actually provide services to other clients, so long as they “can” provide services to other clients under the terms of the contract. 

On the negative side, the test is still too stringent and narrow as a whole.  It also contains the following complicating provision:

“(b) When two bona fide businesses are contracting with one another under the conditions set forth in subdivision (a) [the business-to-business exception], the determination of whether an individual worker who is not acting as a sole proprietor or formed as a business entity, is an employee or independent contractor of the business service provider or contracting business is governed by Section 2775 [the Dynamex test].”

This appears to mean that where one business contracts with another to provide service, the business-to-business exception allows the service provider business to be classified as an independent contractor, but it does not answer the question of whether the service provider’s employees (who actually perform the work) are employees or independent contractors of EITHER business.  The answer to that question is determined by the very narrow Dynamex test (most workers will not qualify as independent contractors.)  What is totally unclear about this is what happens in a situation where the worker is an employee of the service provider, and the service provider is an independent contractor for another business.  Does this provision nonetheless require the worker to be considered an employee of both the service provider and the contracting business?  That would make no sense and is inconsistent with case law holding that Dynamex does not apply to this type of scenario (where a worker is actually employed by one of the entities).

Referral Agency Exception

AB 2257 provided significant change to the referral agency exception. This exception relates to the relationship between a referral agency and the businesses it refers to customers.  Among other things, the new law expands the types of services that the exemption covers, to include things like youth coaching, wedding planning, caddying, interpreting services, consulting, and a host of other services. 

Other Exceptions

AB 2257 also revises and/or adds exceptions for “professional services” and the following unique categories of workers (among others):

• Recording artists;
• Musicians;
• Performance artists;
• Freelance writers and photographers, photojournalists, photo editors, videographers, and other content contributors;
• Fine artists;
• Specialized performers who teach “master classes;”
• Landscape architects;
• Certain field services for the insurance and financial services industries;
• Appraisers and home inspectors;
• Manufactured housing sales;
• Single-engagement events;
• International and cultural exchange services;
• Competition judging

The criteria for each exception are very specific and set forth in the statute.  Any company that utilizes contractors to provide services should review AB 2257 closely to assess whether workers qualify for independent contractor classification.

As you can see, AB 2257 did not resolve the ongoing, broader dispute surrounding the use of independent contractor relationships in the gig economy.  Several companies have teamed up to sponsor Prop 22 on the November ballot.  This proposition will allow the voters to decide that drivers for companies like Uber, Lyft, Door Dash, Postmates, and Instacart may be classified as independent contractors.  Stay tuned for continuing developments in the independent contractor battle in California.  They are sure to continue both legislatively and in the courts.