Employee or Independent Contractor?

California’s AB 2257 Amends AB 5, the Independent Contractor Law

From Lexology, Bruce J. SarchetJames A. Paretti, Jr. and Michael J. Lotito discuss the changes to AB 5, the California law that codified the ABC test for classifying workers as employees or independent contractors, adopte by AB 5227, the bill recently signed by California Governor Gavin Newsom. Bruce, James and Michael write:

Business-to-Business Exception

AB 5’s so-called “business-to-business” exception has been widely criticized by employment attorneys and business owners as unworkable. The test contains so many intertwined and overlapping requirements, that essentially many businesses in the Golden State simply gave up and did not try to shoehorn themselves into this exception. AB 2257 does attempt to clean up this exception, to a certain extent. The bill makes approximately nine different changes in the test, a few of which are highlighted below.

AB 5 includes the following requirement to qualify for the business-to-business exception:

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.8

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.

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.

One of the most problematic sentences in AB 5’s business-to-business exception was the requirement that, in order to qualify for the exception and be able to use the Borello test, a business needed to show:

The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.9

This sentence left many questions unanswered and caused many to conclude that they did not qualify for the exception. For example, last-mile delivery services, which deliver goods to our homes: Are they the “customers” of the original business? It would seem so. This would mean that a furniture manufacturer, for example, couldn’t use contractors to delivery furniture to consumers’ homes without rendering them employees under AB 5.

AB 2257 attempts to clarify this provision as follows:

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.

This could help in some business arrangements, but in the cases identified by the exception in the second sentence, workers will presumably be receiving W-2s, as they are “employees.” So the possibility of using this carve out as a vehicle to upholding independent contractor status seems challenging. And, as with many provisions of the law, this is brand new language, completely untested and with no foundation in other parts of the California code. It is extremely challenging to predict how courts might interpret such new language.

AB 2257 also addresses another potentially troubling sentence from AB 5:

This subdivision does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a contracting business.10

Practitioners were, to put it mildly, confused by this sentence. It leaves many questions unanswered – for example, is a sole proprietorship an individual, or a business entity? The good news is that this sentence has been deleted.

The business-to-business exception in AB 5 also included the following language:

This sentence seems to show the intent of AB 5 to ensure that, at the end of the line, the ABC test is applied. But the sentence was criticized by employment and labor law practitioners as not being a model of clarity.

AB 2257 revises this to read:

When two bona fide businesses are contracting with one another under the conditions set forth in paragraph (1), the determination of whether an individual working for a business service provider is an employee or independent contractor of the business service provider is governed by [the ABC test].

This clarification appears to strengthen the argument that a business service provider itself may be a contractor, but that the persons working for that business service provider would be subject to the ABC test to determine their status.

Read the full story at Independent Contractor Issues in California: Summer 2020 Update – Lexology

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