In September 2019, the California Legislature passed AB 5, which overhauled California law with respect to independent contractor relationships. Contrary to prior law, AB 5 presumed that all workers are employees, rather than independent contractors. Accordingly, hiring businesses who wanted to classify a worker as an independent contractor had the burden of establishing that the worker either (1) fell under one of the exemptions set forth in AB 5; or (2) could meet each element of the stringent “ABC” test, set forth in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018) (Dynamex).
Since its enactment, AB 5 has been the subject of criticism, litigation, and lobbying efforts from a number of “gig” industries, freelancers, and independent contractors that did not find the legislation workable for their industries. In response to some of these concerns, the California Legislature enacted AB 2257, which amended AB 5 and created additional exemptions for certain occupations and contractual relationships. Shortly thereafter, on Election Day 2020, California voters further amended AB 5 by passing Proposition 22, which defines app-based drivers – for companies such as Uber, Lyft, and Door Dash – as independent contractors.
California’s worker classification laws are rapidly developing and businesses operating in California must understand and adapt to these developments, in order to fit their workers into this ever-changing classification scheme. Failure to understand and adapt to the changes in worker classification law can expose California employers to significant risk, including the collection of unpaid wages and back taxes, civil penalties, and civil (and potentially class action) litigation.
Background – AB 5 and the “ABC” Test
AB 5 (Section 2750.3 of the Labor Code) was signed into law on September 18, 2019, by Governor Gavin Newsom. AB 5 codified and expanded the scope of the “ABC” test established in Dynamex. The strict three-prong “ABC” test presumes that all workers are employees, and places the burden on the hiring business to establish the following factors in order to classify a worker as an independent contractor: (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 that is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. If the hiring business fails to establish any of these factors, the worker will remain classified as an employee.
AB 5 also exempted certain occupations, industries, and contractual relationships from the “ABC” test, and continued to allow those hiring entities to use the less-stringent, pre-Dynamex test established in G. Borello & Sons, Inc. v. Department of Industrial Relations 48 Cal.3d 341 (1989) (Borello).
The California Legislature Amends AB 5 by Enacting AB 2257
AB 5 represented a significant change in California law and received concerted pushback and litigation from many industries, including the publishing and entertainment industries, trucking industry, and the “gig” economy, whose workers have traditionally been classified as independent contractors. Indeed, cases have been brought by California truckers, freelance journalists, and gig economy businesses challenging the application of AB 5 to their industries and the constitutionality of the law itself. In response, the California legislature acknowledged the impact of AB 5 on certain industries and effectively rewrote the law to address these concerns through the passage of AB 2257.
AB 2257 expressly repeals Labor Code Section 2750.3 (AB 5) and codifies sections 2775-85 of the Labor Code. However, the core of AB 5 remains unchanged. The strict three-part “ABC” test still applies when determining whether a California worker can be classified as an independent contractor unless there is an exemption, in which case the more lenient Borello test would be used. The main changes that AB 2257 makes are (1) modifying and clarifying the business-to-business, referral agency, and professional services exemptions set forth in AB 5; and (2) exempting additional occupations and business relationships. Some of the significant exemptions that AB 2257 creates or amends are set forth below.
- Business-To-Business Exemption: AB 2257 maintains the exemption for “bona fide business-to-business contracting relationships” where 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.” AB 2257 also extends the business-to-business exemption to include a “public agency or quasi-public corporation” that has retained an independent contractor.
- “Single-Engagement” Business-To-Business Exemption: AB 2257 creates an exemption for a “stand-alone non-recurring event in a single location, or a series of events in the same location no more than once a week” as long as the worker has “control and direction” over the work, mutual freedom to negotiate the rate of pay, a written contract that specifies the pay rate, the tools and materials are provided by the worker, and both the hiring and performing entities maintain separate business locations.
- Entertainment/Music Industry Exemptions: AB 2257 also creates several new entertainment industry exemptions, which are largely focused on the music industry. Some positions that are generally exempt include: recording artists; songwriters, lyricists, composers, and proofers; managers of recording artists; record producers and directors; musical engineers, mixers, and musicians engaged in the creation of sound recordings; vocalists; and independent radio promoters. However, film and television unit production crews, still photographers and cinematographers, are not exempt. Non-independent music publicists are also not exempt. Additionally, musicians and vocalists who do not receive royalties are to be treated as employees for purposes of receiving minimum wages and overtime.
- Referral Agency Exemption: AB 2257 expands the referral agency exemption by adding additional services, including consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors, and interpreting services, among others. The requirements for this exemption have also been modified to allow service providers to negotiate their rates with the client.
- Professional Services Exemption: AB 2257 expands the professional services exemption set forth under AB 5 for still photographers, photojournalists, freelance writers, editors, and newspaper cartoonists who had more than 35 submissions in a year. This exemption now includes services provided by a still photographer, photojournalist, videographer, or photo editor who works under a written contract that specifies the rate of pay and time of payment. AB 2257 also removes the submission requirement, which allows for more workers to fall under this exemption. AB 2257 also adds translators, copy editors, and illustrators to this exemption provided that work is performed under a contract that specifies the rate of pay, time of payment, and intellectual property rights.
- Miscellaneous Exemptions: Subject to certain requirements, AB 2257 also adds 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.
Notably, AB 2257 also grants district attorneys the ability to file injunctive relief actions against businesses suspected of misclassifying employees as independent contractors. Under AB 5 only the Attorney General and certain city attorneys were able to seek such relief.
Proposition 22 Carves Out an Additional Exemption for App-Based Transportation Companies
While AB 2257 addressed the grievances that many industries and freelance workers had with AB 5, it declined to offer exemptions to other industries, such as app-based transportation companies. In response, Uber, Lyft, DoorDash, InstaCart, and Postmates spent more than $200 million in lobbying efforts for a ballot initiative that would override AB 5 and AB 2257, and classify drivers as independent contractors. This ballot initiative was presented to California voters as Proposition 22. California voters were definitive in their support of Proposition 22, with nearly 10 million voters approving the Proposition.
Proposition 22 defined app-based transportation and delivery drivers as independent contractors and adopted certain labor and wage policies specific to app-based drivers and companies. The ballot initiative defined app-based drivers as workers who (a) provide delivery services on an on-demand basis through a business’s online-enabled application or platform or (b) use a personal vehicle to provide prearranged transportation services for compensation via a business’s online-enabled application or platform. Due to this classification, California’s employment and labor laws do not apply to app-based drivers. To address this, Proposition 22 included labor and wage policies specific to app-based drivers and companies. These policies provide workers with minimum compensation levels, health insurance subsidies, medical costs for on-the-job injuries, and prohibits drivers from working more than 12 hours in a 24-hour period unless the driver has been logged off for 6 uninterrupted hours. It also requires companies to develop anti-discrimination and sexual harassment policies; training programs for drivers related to driving, traffic, accident avoidance, and training programs recognizing and reporting sexual assault and misconduct. The ballot initiative also includes zero-tolerance policies for driving under the influence of drugs or alcohol, and requires criminal background checks for drivers.