Changes to California's AB 5 independent contractor law create new opportunities and risks
On September 4, 2020, California Governor Gavin Newsom approved AB 2257, effective immediately. The bill modifies California’s worker classification law to exempt specific occupations and business relationships from the ABC test.
These changes create additional opportunities for individuals, especially those involved in translation/interpretation and the music industry, to remain independent contractors. Specifically, AB 2257 recasts AB 5’s professional services exemption, referral agency exemption, and business-to-business exemption, and additionally encompasses a number of specific occupations that now will fall outside the reach of the ABC test.
The ABC test and AB 5
Under the ABC test, an individual providing services to an entity is presumed to be an employee unless the hiring entity can establish that:
A. the worker is free from control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact
B. the worker performs work that is outside the usual course of the hiring entity’s business, and
C. the worker is customarily engaged in an independent established trade, occupation, or business of the same nature as the work performed
As the California Supreme Court held in Dynamex v. Superior Court, 4 Cal.5th 903 (2018), if a hiring entity can satisfy each of these prongs, the individual may be considered an independent contractor instead of an employee. However, under AB 5, which became effective January 1, 2020, the California Legislature both codified the main holding of Dynamex and set forth various exemptions from this test – any position or occupation that fell under an exemption would instead be subject to the common law, multi-factor Borello test to determine whether an individual may be considered an employee or independent contractor. AB 2257 expands on those exemptions, as discussed further below.
Business-to-business exemption
AB 2257 broadens this exemption and creates an additional exemption for relationships between two or more sole proprietors, subject to various requirements. This is a dramatic change, given that the previous business-to-business exemption excluded sole proprietorships. This exemption for sole proprietors also includes services provided for certain single-engagement events, defined as stand-alone non-recurring events in a single location, or a series of events in the same location no more than once a week. Additionally, while the law previously required that business service providers have existing contracts with other businesses to provide the same or similar services as those involved in the work performed, AB 2257 now simply requires that service providers have the ability to do so, regardless of whether those contracts exist. This eliminates any potential argument that contracting entities must audit their contractors to ensure they have additional customers, easing burdens on California business.
Referral agency exemption
The new bill expands this exemption by adding a number of additional services to a now non-exhaustive list of services that qualify for the exemption, including consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors, and interpreting services – all groups that have traditionally been independent contractors. The requirements to qualify for this exemption have also been modified to allow service providers to negotiate their rates with the client, either directly or now through the referral agency.
With respect to interpreting services, AB 2257 specifies that these services only encompass those provided by a certified or registered interpreter in a language with certification or registration available through the Judicial Council of California, State Personnel Board, or any other agency or department either in California or recognized by one of the following: Registry of Interpreters for the Deaf; Certification Commission for Healthcare Interpreters; National Board of Certification for Medical Interpreters; International Association of Conference Interpreters; United States Department of State; or the Administrative Office of the United States Courts, unless the interpreter is providing services in a language not covered by one of these entities. Entities attempting to utilize this exception should ensure that interpreters they engage with have one of these certifications as part of the onboarding process.
While these additions broaden the reach of the referral agency exemption, AB 2257 specifies that the determination of whether an individual worker is an employee of the service provider or of the client to whom the services were provided is subject to the ABC test. That is, the ABC test governs whether an individual is an employee of the contractor referred to for the provision of services or of the client to whom services were directly provided to.
Professional services exemption
Instead of simply adding to the professional services exemption set forth under AB 5 for still photographers, photojournalists, freelance writers, editors, and newspaper cartoonists who had over 35 submissions in a year, AB 2257 replaces the prior exemption with broader language. Indeed, the professional services exemption now generally encompasses services provided by a still photographer, photojournalist, videographer, or photo editor who work under a written contract that specifies the rate of pay and time of payment. This update disregards the submission requirement and allows for more individuals to fall under the exemption.
AB 2257 also adds new jobs as professional services subject to certain requirements. Translators, copy editors, and illustrators are now included as part of this exemption provided that work is performed under a contract that specifies the rate of pay, time of pay, and intellectual property rights. There is some interplay with other exceptions here – for example, unlike the interpretive services exception, the translator professional services exception does not require individuals to form an entity or have court certifications. However, the work performed may not directly replace that of an employee who performed the same work at the same volume for the hiring entity, nor may the work be primarily performed at the hiring entity’s business location. The service provider may also not be restricted from working for more than one entity. Content contributors, advisors, producers, narrators, and cartographers have also been added to the exemption, again so long as their services are performed under a contract with the same requirements. But despite these expansions, still photographers, photojournalists, videographers, and photo editors who work on motion pictures are still excluded from this exemption.
Music and performance industries exemption
Notably, AB 2257 largely impacts the music and performance arts industries. The bill specifically exempts positions related to the creating, marketing, promoting, or distributing of sound recordings or musical compositions. This list includes recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineer and mixers, musicians engaged in the creation of sound recordings, vocalists, photographers working on recording photo shoots and related content, independent radio promotors, and any other individual engaged to render any creative, production, marketing, or independent music publicist services related primarily to the creation, marketing, promotion, or distribution of sound recordings or musical compositions. However, AB 2257 explicitly states that film and television unit production crews, including still photographers and cinematographers and works of live or recorded performances for audiovisual works, are not exempt. Non-independent music publicists are also not exempt.
Further, musicians and vocalists who do not receive royalties are to be treated as employees solely for purposes of receiving minimum wages and overtime. Thus, these individuals must be paid the equivalent of minimum wage as well as any overtime premiums for the duration of the services performed. Otherwise, they may bring claims of failure to pay minimum wage or overtime, subjecting hiring entities to the relevant statutory penalties.
Additionally, musicians and musical groups performing single-engagement live performance events are also exempt unless: (1) the group is performing as a symphony orchestra, at a theme park or amusement park, or a musician is performing in a musical theater production; (2) the group is an event headliner for a performance taking place in a venue location with more than 1,500 attendees; (3) the group is performing at a festival that sells more than 18,000 tickets per day. Individual performance artists who perform original work are exempt as well, so long as they are free from the control and direction of a hiring entity in connection with the performance of work, intellectual property rights are retained by the individual, the individual may set their terms of work and negotiate rates, and the individual is free to accept or reject individual performance engagements free from penalty.
Miscellaneous exemptions
Additionally, AB 2257, subject to certain requirements, provides exemptions for individuals engaged in underwriting inspections and other services for the insurance industry, manufactured housing salespersons, certain individuals engaged by international exchange visitor programs, and competition judges.
Considerations moving forward
In light of the significant modifications AB 2257 places on the exemptions provided by AB 5, companies are strongly encouraged to evaluate existing agreements with independent contractors and determine the impact of AB 2257 on their business practices, stay apprised of any other potential changes to the AB 5 framework moving forward, and monitor litigation in this area. Significantly, AB 2257 now empowers district attorneys to also enforce AB 5 – previously only the Attorney General and certain city attorneys possessed this power. Accordingly, businesses may see an increase in litigation from district attorneys seeking to prosecute misclassification issues.
Learn more about this development by contacting any of these DLA Piper Employment partners in California:
