The “ABC” Test, As Modified

In 2018, the California Supreme Court (in Dynamex Operations West, Inc. v. Superior Court) created a strict new test for determining whether a worker is an employee or an independent contractor, with a greater presumption that workers should be characterized as employees.  As previously discussed, the “ABC” test presumes that a worker is an employee unless the an employer can meet its burden of proof with respect to all three of the following factors:

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

In 2019, the California legislature passed AB 5 to codify the ABC test and clarify its application.  This statute exempted dozens of specific occupations, which continue to be subject to the less-stringent Borello test.  These exempt occupations include, among others, artists, cosmetologists, accountants, and lawyers.

On September 7, 2020, Governor Gavin Newsom signed a new bill into law AB 2257 that adds to this list of carveouts from the ABC test, modifies the existing exemptions, and increases state enforcement power.

Modified Exemption

This law changes two general exemptions to allow more businesses to treat workers as independent contractors.

First, the “referral agency exemption” allows businesses that connect customers and service providers to follow the Borello test if the worker meets eleven specified criteria.  The statute already provided a list of jobs that qualify for the exemption.  AB 2257 expands this list and makes it non-exhaustive, so more business can now use this exception to classify referred service providers as independent contractors (as long as they meet all of the criteria).  While this change benefits many gig-economy companies, the exception specifically does not apply to workers who provide, inter alia, “delivery, courier, [or] transportation” services.

AB 2257 also changed the criteria to make it easier for businesses to use this exception.  For example, under the old criteria, businesses had to give service providers the sole power to set their rates, but under the new criteria, the rates can be negotiated.

Second, the “business-to-business exemption” allows a service provider to work with a contracting business provided the listed criteria are met.  While many commentators have described this as the “narrowest exemption” in the law, AB 2257 scales back several requirements to make it easier for businesses and workers to use this exemption.  Specifically, it scales back a requirement that these businesses have existing contracts with other businesses and gives contractors some leeway to serve the contracting company’s customers directly.  Further, AB 2257 creates a new exemption for business-to-business relationships between two sole proprietors, provided all of the other criteria is met.

Finally, AB 2257 revises existing carveouts for several occupations.  Most notably, it lowers the bar for media outlets to treat freelance journalists and photographers as contractors.  AB 5 had imposed an annual limit (35) on the number of submissions before freelance writers and photographers were subject to the ABC test.  AB 2257 eliminates this 35-submission cap, allowing outlets to treat freelancers as independent contractors regardless of the number of submissions.  It also includes some new restrictions, but still does not exempt video producers and audio-based journalists.

New Carveouts

These laws add the following professions and occupations to the list of exceptions:

  • newspaper distributers and carriers;
  • workers who provide underwriting inspections and other services for the insurance industry;
  • manufactured housing salespeople;
  • workers engaged by an international exchange visitor program;
  • workers who provide consulting services;
  • workers who provide animal services;
  • competition judges;
  • licensed landscape architects;
  • specialized performers teaching master classes;
  • registered professional foresters;
  • real estate appraisers and home inspectors; and
  • and feedback aggregators.

Each of these categories is subject to unique requirements and exceptions which must be met before the exception applies.  Some of these exceptions—such as the exception for newspaper distributers and carriers—expire after a certain date.  If the exception applies, then a worker’s classification should be evaluated under the less-stringent Borello test.

Expanded Enforcement

AB 5 already permitted state and city attorneys with more than 750,000 people to force businesses to comply with the ABC test.  (Notably, California’s Attorney General recently won a preliminary injunction requiring Uber and Lyft to treat their drivers as employees.)  That case is currently pending appeal.  AB 2257 expands the number of government attorneys who can enforce the new test by including all district attorneys.

If you are interested in discussing these issues further, or have any questions about this blog, please contact us.