Independent Contractors: AB 2257 Employment Law in California

Just as Companies doing business in California began to get acclimated to the statutory changes created by AB5, the legal requirements surrounding who qualifies as an Independent Contractor have shifted once again. 

The AB5 legislation, which went in effect on January 1, 2020, codified the ABC Test as the default standard for assessing who legally could be treated as Independent Contractors, rather than employees of the hiring entity, and also set for a list of limited exemptions. 

On September 4, 2020, California’s Governor signed into law AB 2257.  Most Companies are aware this amendment to the Labor Code removed some of the restrictive limits on services provided by freelance writers, photographers, and editors.  However, there are some additional nuances and changes that were included by this amendment that should not be overlooked.

Business to Business and Employment Law:

The business-to-business exemption received a few alterations.

The first change worth mentioning is that “public agency or quasi-public corporation” was inserted into the definition of a “contracting business,” thereby clarifying that if one of these contracting businesses can demonstrate that all 12 criteria are met, they can proceed with utilizing the Borello Test rather than the ABC Test.  (for more on B2B and AB5 look here)

Another big change is that LC 2776(b) now reads: “When two bona fide businesses are contracting with one another…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.” 

This change is a critical one for all contracting businesses to understand.  This section indicates that the ABC test will be applicable in determining whether an individual worker utilized by an independent contractor in performing the services, even though not directly engaged by the hiring entity, is considered an employee of both the independent contractor and the hiring entity.

While case law holds that the ABC Test does not apply where a worker has been classified as an employee, this unclear new phrasing could lead to litigation and potential liability if you are engaging independent contractors that have the ability to utilize other independent contracts to perform the services for you as the hiring entity.

Finally, there is also now a “single-engagement”” exemption which addresses individual business persons contracting with one another “for purposes of providing services at the location of a single event” or “a series of events in the same location for no more than a week.”  For this exemption to be applicable, the following criteria need to be met:

1. Neither individual is subject to control and direction by the other, in connection with the performance of the work, both under the contract for the performance of the work and in fact.
   
   
2. Each individual has the ability to negotiate their rate of pay with the other individual.
   
   
3. The written contract between both individuals specifies the total payment for services provided by both individuals at the single-engagement event, and the specific rate paid to each individual.
   
   
4. Each individual maintains their own business location, which may include the individual’s personal residence.
   
   
5. Each individual provides their own tools, vehicles, and equipment to perform the services under the contract.
   
   
6. If the work is performed in a jurisdiction that requires an individual to have a business license or business tax registration, then each individual has the required business license or business tax registration.
   
   
7. Each individual is customarily engaged in the same or similar type of work performed under the contract or each individual separately holds themselves out to other potential customers as available to perform the same type of work.
   
   

Referral Agency Exemption:

The referral agency exemption to the ABC test addresses relationships between an individual operating as a sole proprietor or a business entity (“service provider”) and a business that refers that individual’s services to clients (“referral agency”).  There are eleven criteria that must be met to qualify for the exemption and be subject to the less restrictive Borello factors (for a list of those eleven factors, see LC 2777(a)(1)-(11)). 

However, AB 2257 expanded the language of the referral agency exemption significantly, expressly applying the exemption to additional services like consulting, tutoring, graphic design, web design, photography, tutoring, consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors, minor home repair, moving, errands, furniture assembly, animal services, dog walking, dog grooming, picture hanging, pool cleaning, yard cleanup, and interpreting services. 

However, it is noted again in this section that “the determination of whether an individual worker is an employee of a service provider or whether the individual worker is an employee of a client is governed by Section 2775,” which is the ABC Test.  This means service providers and clients still need to be cautious.

Professional Services Exemption:

For an exemption to apply to contracts involving “professional services” if all the following factors are met:

1. The individual maintains a business location (even if it’s the individual’s residence) that is separate from the hiring entity. Nothing prohibits the individual from performing services at hiring entity’s location.
   
   
2. If work is performed more than six months after AB2257 was passed and the work is performed in a jurisdiction that requires the individual to have a business license or business tax registration, the individual has the required business license or business tax registration, in addition to any required professional licenses or permits for the individual to practice in their profession.
   
   
3. The individual can set or negotiate their own rates.
   
   
4. Outside of project completion dates and reasonable business hours, the individual can set the individual’s own hours.
   
   
5. The individual is customarily engaged in the same type of work for others or holds themselves out to other potential customers.
   
   
6. The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.

If all these factors are met, the relationship must STILL be evaluated based on the preexisting “Borello” test.

“Professional services” includes a sole proprietor or business entity providing marketing, administration of human resources, travel agent services, graphic design, grant writing, fine artists, payment processing agents, appraisers, and registered professional foresters.

The exemption also includes a:

• Still Photographer
• Photojournalist
• Videographer
• Photo Editor
• Freelance Writer
• Translator
• Editor
• Copy Editor
• Illustrator
• Newspaper Cartoonist
• Content Contributor
• Advisor
• Producer
• Narrator

As noted previously, AB2257 eliminated the submission caps and restrictions that photographers and journalists were grappling with after AB5.

Music Industry & Performer Exemptions:

The less restrictive Borello test shall also apply to 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. Musicians and vocalists who are not royalty-based participants in the work created during any specific engagement shall be treated as employees solely for purposes of receiving minimum and overtime wages for hours worked during the engagement. 

Also, musicians engaged for a single-engagement live performance event are exempt from the ABC Test and subject to Borello unless they (a) 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 individuals performing comedy, improvisation, stage magic, illusion, mime, spoken word, storytelling, or puppetry) will qualify for an exemption so long as they are free from the hiring entity’s control, retain the intellectual property that was created in connection with the performance, can reject or accept the engagement without penalty, set their terms of work, and negotiate their rates.

Employment Law in California: More Changes are Likely to Come!

This will certainly not be the last set of changes we see to the definitions, requirements, and multiple tests associated with proper classification of independent contractors in California. 

In fact, we can anticipate even more changes depending on what happens with California Proposition 22, which is pending on the November’s ballot.   With enforcement of misclassification on the rise, it is more critical than ever that organizations stay up to date on these changes. 

TCWGlobal has been helping companies with their contingent workforce needs and 1099 Compliance/Management for over a decade now.  We are here to help and make compliance simple.

Need Help?

Whether you need expertise in Employer of Record (EOR) services, Managed Service Provider (MSP) solutions, or Vendor Management Systems (VMS), our team is equipped to support your business needs. We specialize in addressing worker misclassification, offering comprehensive payroll solutions, and managing global payroll intricacies. 

From remote workforce management to workforce compliance, and from international hiring to employee benefits administration, TCWGlobal has the experience and resources to streamline your HR functions. Our services also include HR outsourcing, talent acquisition, freelancer management, and contractor compliance, ensuring seamless cross-border employment and adherence to labor laws. 

We help you navigate employment contracts, tax compliance, workforce flexibility, and risk mitigation, all tailored to your unique business requirements. Contact us today at tcwglobal.com or email us at hello@tcwglobal.com to discover how we can help your organization thrive in today's dynamic work environment. Let TCWGlobal assist with all your payrolling needs!

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