Eight months after California's worker classification law (AB 5) was implemented, we have new rules again. On September 4, 2020, Governor Newsom signed AB 2257, a clean-up measure for AB 5 that maintains its essential framework for classifying workers but also revises and clarifies the legislation and expands the list of exempt occupations.

How'd We Get Here?

Here's a brief timeline:

1989 - Borello case: The CA Supreme Court issued a decision laying out 11 factors to be considered in the classification of workers. Generally, Borello assesses the degree of control the payer and the contractor exert on their working relationship.

April 30, 2018 - Dynamex case: The CA Supreme Court issued a new decision (the basis for AB 5) and crafted the "ABC" test for determining whether a worker is an employee or an independent contractor, including exemptions for several professions. To qualify as an independent contractor, a worker must meet all three criteria:

(A) Is free from the control and direction of the company in performing work, both practically and in the contractual agreement between the parties

(B) Performs work that is outside the usual course of the company's business

(C) Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company

January 1, 2020 - Dynamex became law in the form of AB 5.

What's This New Law?

AB 2257 maintains the essential framework of AB 5 (the ABC test), but also revises and clarifies the legislation. The list of exempt occupations has been expanded, including many within creative industries. Key aspects include:

• Business-to-business exemption: It maintains exemption for "bona fide business-to-business contracting relationships" where a contractor "acting as a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership or corporation contracts to provide services to another such business."

• "Single-engagement" business-to-business exemption: This creates an exemption from the ABC test for individual businesspersons who contract with one another "for purposes of providing services at the location of a single-engagement event." Providing certain criteria are met, the ABC test will not apply where one individual contracts with another to perform services at "a stand-alone non-recurring event in a single location, or a series of events in the same location no more than once a week."

• Music industry and performer exemptions: Several exemptions were created in the music industry. Again, specific criteria regarding ownership of the creative product, whether a recording is made, and how large audiences are will be factors. It's important to note that this is still not an exemption for many recording, television or film artists' work.

• Professional services exemption: This is now a long list of covered professions that can satisfy an IRS common law test, rather than the ABC test, and be qualified as independent.

• Referral agency exemption: Referral agencies and those who provide services via a referral agency may also be exempt from the ABC test but must also meet certain professional criteria.

What Does This Mean for Employers?

The bigger and more realistic changes, effective now, are:

• There are now more than 50 businesses and exceptions that have exemptions (providing criteria are met). Some make sense, and others do not. Know your industry and refer to the text of the law when making an interpretation.
• Even when a business may qualify for an exemption, the Borello test must be satisfied. The worker must clearly exhibit independence and expertise.
• Ride sharing and other gig economy workers are still in a very cloudy grey area along with motion picture and television industry workers. It remains to be seen whether they'll be made employees and lose certain workplace liberties, or remain contractors with employee benefits and wage protections unavailable to them.

As always, stay tuned...

Need help with your worker classification process? Feel free to call our HR experts, even if you are not a California employer. We can evaluate your risk, suggest remedies, and implement workflow changes to reroute payments to payroll before they are incorrectly processed as a vendor payment.