Key Takeaways

• Gov. Gavin Newsom signed AB 2257 into law on September 4, 2020, which went into effect immediately upon signature and focuses largely on expanding and/or clarifying the exemptions to the ABC test under AB 5

• AB 5 codifies and clarifies the three-part ABC test, adopted in the Dynamex decision, for determining a worker’s classification as either an independent contractor or an employee

• California employers in a number of industries are effected by AB 2257 and should pay close attention to the changes and to the litigation that will no doubt ensue from its enactment

The enactment of AB 5 by the California legislature, which codified the “ABC test” for independent contractor status adopted in the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc. v. Superior Court, led to a deluge of controversies, legal action, and lobbying. In an effort to clarify the muddy waters left behind by AB 5, California Gov. Gavin Newsom signed AB 2257 on September 4, 2020. AB 2257, which went into effect immediately upon signature, focuses largely on expanding and/or clarifying the exemptions to the ABC test under AB 5. California employers in a number of industries are effected by AB 2257 and should pay close attention to the changes contained therein and to the litigation that will no doubt ensue from its enactment.

Review of AB 5 and Exemptions

Before diving into the changes brought about by AB 2257, it is helpful to quickly review the scope and breadth AB 5. AB 5 codifies and clarifies the three-part ABC test, adopted in the Dynamex decision, for determining a worker’s classification as either an independent contractor or an employee. The Dynamex ABC test dictates that workers are, by default, employees under California law unless the hiring entity is able to establish each of the following:

1. The worker is free from control and direction of the hiring entity over performance of the work, both under the contract and in fact
2. The worker performs work that is outside the usual course of the hiring entity’s business
3. The worker is customarily engaged in an independently established trade, occupation, or business

AB 5 applies broadly to the entire California Labor Code, the Unemployment Insurance Code, as well as the wage orders of the Industrial Welfare Commission (IWC). AB 5 further applies retroactively to existing claims and actions “to the maximum extent permitted by law.”

There are a narrow list of specified occupations and industries that, in addition to existing statutory exemptions, would be exempt from the ABC test. This list includes medical professionals, lawyers, architects, engineers, private investigators, accountants, securities broker-dealer or investment advisers, direct salespersons, commercial fishermen, aestheticians, hairstylists, real estate agents, and others―many of which have their own limiting clarifications specified in the text of AB 5.

In the case of the above exemptions, the worker’s status are governed by the more malleable and permissive multifactor test adopted in the S. G. Borello & Sons, Inc. v. Department of Industrial Relations decision. Under Borello, a worker’s classification is evaluated by several factors, the primary of which is a determination of the hiring entity’s right to control the work product.

The exemptions for certain occupations and industries led to intensive lobbying efforts on the part of many industries to seek either clarity regarding the application of these exemptions or to seek additional carve outs for other industries. These efforts have culminated in the enactment of AB 2257.

AB 2257: Clarification and Expansion of AB 5

The focus of AB 2257 is upon clarifying, and in some cases, expanding the industry specific exemptions set out in AB 5. At approximately 14 pages in length, getting through the nuances of AB 2257 does indeed require a proverbial fine tooth comb. However, many of these changes are potentially significant and have opened the door for new potential enforcement actions and litigation. Below is a summary of some of the key changes under AB 5:

• Clarification of the Business-to-Business Exemption. Under AB 5, an exemption exists for “bona fide business-to-business contracting relationships.” Under AB 2257:
  • Individuals acting as sole proprietors may engage as independent contractors under the business-to-business exemption
  • The business-to-business exemption now applies to a “public agency or quasi-public corporation” that has retained a contractor
  • Businesses contracted to provide services to another business’s customers can do so under the business-to-business exemption when the services are being performed by the business service provider’s employees under their employer’s name and the business service provider regularly contracts with other businesses
  • A new exemption is created for individuals who contract with one another “for purposes of providing services at the location of a single-engagement event,” provided certain criteria are met
• Clarification of the Referral Agency Exemption. AB 2257 expands the scope of the referral agency exemption significantly, expressly applying the exemption to a non-exclusive list of additional services, including consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors, and interpreting services.
• Clarification of Exemptions for Writers, Photographers, and Journalists. AB 2257 clarifies requirements for existing exemptions for writers, still photographers, and journalists:
  • Removes limitation on number of submissions for certain independent contractors, including photographers, photojournalists, videographers, photo editors, freelance writers, editors, copy editors, illustrators, and newspaper cartoonists, before triggering the need to be classified as employees
  • Expands occupations that may be exempt from the AB test to include content contributors, advisors, producers, narrators, or cartographers for certain publications (provided they do not displace existing employees); specialized performers hired to teach a class for no more than a week; appraisers; registered professional foresters; and home inspectors
• New Music Industry and Performance Exemptions. Several new exemptions are created under AB 2257 for the music industry:
  • The following professions are exempt from the ABC test, including 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 musical groups engaged for a single-engagement live performance event are exempt from the ABC test, provided that they meet certain restrictions
  • Individual performance artists, such as comedians, improvisers, magicians and illusionists, mimes, spoken-word performers, storytellers, and puppeteers, who perform original work they created will qualify for an exemption provided specific requirements are met
• Additional New Exemptions. Miscellaneous exemptions are added under AB 2257 for manufactured housing salespersons; certain individuals engaged by international exchange visitor programs; and competition judges (including amateur umpires and referees).

Key Takeaway for Employers

While AB 2257 does offer some additional clarity regarding existing exemption under AB 2257 and expands exemptions for specific industries, misclassification remains a significant risk for California employers due to the convoluted nature of current regulations. Moreover, it is important to keep in mind that even if an exemption applies, the common law Borello multi-factor test must still be applied to determine the worker’s status. Employers should exercise extreme caution in classifying workers and should consult legal counsel to carefully evaluate new and existing worker classification.

If you have any questions about these changes or how they impact your business, please contact:

• Victor T. Xu
• Matthew Golper
• Caroline J. Berdzik
• Peter J. Woo
• Kristin Klein Wheaton
• Or another member of the Employment and Labor team