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California Legislation

Learn more about AB 5 – Employment Status and Labor Code 2775 to determine how it impacts departments.

Assembly Bill No. 2257 “A-B-C” Test

California Legislature adopted this test in 2019 via AB 5. AB 5 and Dynamex apply a three-part “A-B-C” test to determine if a worker is an employee or an independent contractor. AB 2257 keeps the A-B-C test, which presumes that any person providing labor is an employee, unless the hirer can satisfy each element of the test:

A. The worker is free from the control and direction of the hirer in connection with the performance of the work;

B. The worker performs work outside of the usual course of the hirer’s business; and

C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the hirer cannot establish all three factors for their workers, the workers are considered employees and not independent contractors under the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission.

The A-B-C test does not apply to all workers in California. AB 5 carved out exemptions for licensed architects, engineers, accountants, and other professional services. If a worker is exempt, then an employer would still apply the old Borello test that balances factors to determine if the worker is treated more like an employee or an independent contractor. AB 2257 now creates additional exemptions from the A-B-C test, as outlined below, and so it increases the use of the Borello test. A hiring entity must first determine which test to use (A-B-C or Borello) and then assess its relationship with a worker under the appropriate test.

Licensed Professional Exemption

The law specifically exempts certain occupations from the A-B-C test. Notably, an individual who holds an active license from the State of California and is a practicing architect, landscape architect, engineer, lawyer, private investigator, or accountant is exempt. AB 2257 expanded the exemption to include landscape architects. An employer would use the older Borello test to determine if the licensed professional should be classified as an employee or independent contractor. It is important to note that this exception only applies to licensed individuals, not someone generally working in the profession.

Labor Code section 2783 contains additional exemptions for other professions (such as insurance industry professionals, security brokers, and newspaper distributors). This demonstrates an important point about AB 2257 – many industries successfully lobbied for an exemption, and even if a relationship does not meet one of the general exemptions, it is worth reviewing the law for potential loopholes.

Expansion of Professional Services Exemptions
AB 2257 also expanded and clarified additional exemptions for certain “professional services” in Labor Code section 2778. For purposes of this law, “professional services” includes services for human resources administration, marketing involving original and creative content, graphic design, fine art and photography, appraisers, home inspectors, professional foresters, referral agencies, professional photographers, videographers, freelance writers, content creators, and photo editors, as well as some other limited artistic or technical work. Individuals providing professional services are exempt from the A-B-C test when the individuals perform the specified work under the law and:

  1. maintain a business location separate from the hiring entity;
  2. have a business license, in addition to any required professional licenses or permits for the individual to practice in their profession;
  3. set their own rates;
  4. control their own hours;
  5. hold themselves out as able to do the same type of work for others; and
  6. have discretion and judgment in performing the services.

Musical Recording Exemptions

AB 2257 provided greater clarity for exemptions from the A-B-C test related to the creation, promotion, and distribution of music. Recording artists, songwriters, record producers, musicians, music engineers, photographers for marketing shoots, and any other individual engaged to render any creative, production, marketing, or independent music services now fall under the Borello test.

This exemption does not apply to film and television production crews, musicians engaged in one-time performances, or musicians who do not receive royalties. For example, a musician or recording artist who negotiated and was paid through royalties would be subject to Borello and would likely be an independent contractor, whereas a musician who was not a royalty-based participant in the work created during a specific engagement would be treated as an employee (e.g., a musician in a symphony orchestra would be an employee because they would not be subject to this exemption).

Bona Fide Business-to-Business Exemption to Sole Proprietors and Partnerships

AB 5 included a test to exempt bona fide business-to-business relationships from the A-B-C test, but only for corporations and LLCs. This left sole proprietors working under their own shingle  out in the cold. Fortunately, AB 2257 created Labor Code section 2776, which broadens the eligibility for this exemption so that it now includes a separate sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership, or corporation. The relationship is exempt from the A-B-C test and the parties would use the Borello test if they can demonstrate all of the following:

  1. The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. There is no need to establish this factor if:
    • The business 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.
  3. The contract with the business service provider is in writing and specifies the payment amount, including any applicable rate of pay, for services to be performed, as well as the due date of payment for such services.
  4. If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
  5. The business service provider maintains a business location, which may include the business service provider’s residence, that is separate from the business or work location of the contracting business.
  6. The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
  7. The business service provider can contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.
  8. The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
  9. Consistent with the nature of the work, the business service provider provides its own tools, vehicles, and equipment to perform the services, not including any proprietary materials that may be necessary to perform the services under the contract.
  10. The business service provider can negotiate its own rates.
  11. Consistent with the nature of the work, the business service provider can set its own hours and location of work.
  12. The business service provider is not performing the type of work for which a license from the Contractors’ State License Board is required (as this relationship is governed by a different exemption, noted below).

Although this is a long list and a hiring entity must establish each of the elements, most bona fide business-to-business relationships will pass the test. However, the prudent business should confirm its third-party contracts satisfy this test, if other exceptions are not available.

“Single-Engagement” or Event Business to Business Exemption

AB 2257 created Labor Code section 2779 which establishes an exemption for event contractors so that hiring someone as an independent contractor for a one-off event is easier. If two individuals contract and each individual has their own business (either as a sole proprietor or separate business entity such as an LLC or corporation) at the location of a “single-engagement event” or series of events, the exemption applies (and so the parties would use the Borello test) if:

  1. Neither individual is subject to the control and direction of the other in the course of the performance of their work;
  2. Each individual has the ability to set their own rate with the other;
  3. There is a written contract between both individuals that specifies the total amount of payment for both parties;
  4. The individuals maintain their own business locations;
  5. The individuals provide their own tools and equipment required;
  6. They have the requisite business license or business tax registration (provided the jurisdiction they are in requires one);
  7. Each individual is customarily engaged in the same or similar type of work they are performing under the contract; and
  8. Each individual may freely contract with other businesses to provide those services without restrictions.

The bill provides that “single-engagement” events refer to stand-alone non-recurring events that take place at a single location, or a series of events in the same location, so long as they do not occur more than once a week.

Licensed Construction Subcontractor Exemption

Construction subcontractors remain exempt from the A-B-C test. The relationship is governed by the Borello decision if the contract meets the following criteria:

  1. the subcontract is in writing;
  2. The subcontractor is licensed by the Contractors’ State License Board and the work is within the scope of that license;
  3. The subcontractor has the required business license (if the jurisdiction requires one);
  4. The subcontractor maintains a business location separate from the business location of the contractor;
  5. The subcontractor has the authority to fire and hire other persons;
  6. The subcontractor assumes financial responsibility for errors in labor or services provided; and
  7. The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.

This provision does not apply to truckers who own their truck and work as employees of a trucking company, although the trucking industry is litigating this issue and it may possibly change.

The Borello Test

When a Worker Is Exempt From the A-B-C Test
The A-B-C test is the default test, and a hirer must establish that a worker is subject to an exemption. If it establishes an exemption, the law assesses the relationship using the Borello test, which looks at the entirety of the relationship and assesses the overall “economic reality” of the relationship. The most significant factor in the Borello test is whether the company has control (or the right to control) the worker both as to the work done, and the manner in which the work is performed. Essentially, does the hiring entity control the means and methods of the worker, or is the hiring entity only focused on the final product? It also considers additional factors (depending on the issues involved), such as:

  • whether the person performing work is engaged in an occupation distinct from that of the company;
  • whether the work is part of the company’s regular business;
  • whether the company or the worker supplies the equipment, tools, and the place for the person doing the work;
  • the worker’s financial investment in the equipment or materials required to perform the work;
  • the skill required in the particular occupation;
  • the kind of occupation, with reference to whether, in the locality, the work is usually done under the company’s direction or by a specialist without supervision;
  • the worker’s opportunity for profit or loss depending on his or her own managerial skill (a potential for profit does not include bonuses);
  • how long the services are to be performed;
  • the degree of permanence of the working relationship;
  • the payment method, whether by time or by the job; or
  • whether the parties believe they are creating an employer/employee relationship.

The Borello test does not automatically make an individual an employee based on one fact or factor. Instead, all factors are balanced and weighed against each other to determine if a worker is more like an employee or an independent contractor based on the “economic reality” of their relationship. This is different from the A-B-C test, which requires the hiring party to establish all three elements of the test in order to classify the worker as an independent contractor.