Q: What are the details of Assembly Bill (AB) 2257 and how does it change the way I utilize independent contractors?

A: On September 4, 2020, Gov. Gavin Newsom signed Assembly Bill (AB) 2257, which substantially revises and clarifies the exemptions to AB 5, a recently passed California statute that effectively precludes many industries from being able to utilize independent contractors.

AB 5 was signed into law on January 1, 2020, and requires using the “ABC Test” to determine whether a worker in California is an employee or independent contractor under the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission wage orders. Under the ABC Test, to defeat claims premised on independent contractor misclassification, a defendant must demonstrate: (A) the worker is free from control and direction of the hiring entity in connection with performing the work, both under contract and in fact; (B) the worker performs work outside the usual course of the hiring entity’s business, and; (C) the worker customarily engages in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. Many industries have complained about component (B), which effectively precludes independent contractors from performing work in the business of the hiring company.Although AB 2257 maintains the general framework of AB 5, it creates a myriad of new statutory exemptions from the ABC Test. The exemptions establish situations where workers are not treated as employees. All of the exemptions are to be applied retroactively. Two of AB 2257’s most notable exemptions are as follows:

  • Referral Agency Exemption: AB 2257 greatly expands AB 5’s referral agency exemption, which can exempt the relationship between a business that refers workers and the business to which the works are referred. AB 2257 states that the ABC Test governs “the determination of whether an individual worker is an employee” of a contractor who is referred to provide services, or an employee of a client to which the contractor was referred. Additionally, AB 2257 significantly increases the scope of the referral agency exemption by applying it to a non-exclusive list of services, which includes caddying, wedding or event planning, consulting, youth sports coaching, services provided by wedding and event vendors, and interpreting services.
  • Business-to-Business Exemption: Under AB 5, the ABC Test does not apply to bona fide business-to-business contracting relationships when 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.” Under AB 2257, the scope of the business-to-business exemption has been increased to include instances in which a “public agency or quasi-public corporation” has retained a contractor. AB 2257 also removes the requirement that a business service provider provide services directly to the contracting business rather than to customers of the contracting business so long as “the service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.”

Although AB 2257 significantly modifies AB 5 by providing relief to several industries that have traditionally relied on independent contractors, notably absent from its text are any exemptions for gig economy companies, rideshare drivers, or motion picture industries. Accordingly, we anticipate these industries will continue to lobby for significant exemptions from AB 5 in order to preserve their ability to utilize independent contractors.