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AB 5 “2.0” – California Tweaks its Independent Contractor Ban

California has amended its independent contractor law to make more jobs and professions exempt from the “ABC” test that AB 5 codified last year.  Governor Newsom signed the amendment into law on September 4, 2020. It becomes effective immediately.

AB 2257 modifies and expands the list of professions exempt from the “ABC” test to include additional occupations and industry areas. These changes primarily impact freelance writers, musicians, film support crews and visual artists, making it easier for companies to classify them as independent contractors. 

With these amendments, roughly 75 professions or types of businesses are now exempt from the independent contracting test set out in AB 5, meaning employers are able to use the common law Borello test instead of the more restrictive “ABC” test to assess whether the workers are employees or independent contractors.

Below is the new list of exempt occupations, services and businesses, with the changes and updates from AB 5’s original provisions highlighted in red.

Exempt Occupations “Professional Services” Exemptions Business-to-Business Exemption
  • Recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians engaged in creating sound recordings, vocalists, photographers working on album covers, and other press and publicity photos relating to recordings, and independent radio promoters;
  • Musicians or musical groups for the purpose of a single-engagement live performance event;
  • Individual performance artists;
  • Licensed landscape architects;
  • Freelance translators, content contributors, advisors, narrators, cartographers, producers, copy editors, and illustrators;
  • Registered professional foresters;
  • Real estate appraisers;
  • Home inspectors;
  • Persons who provide underwriting inspections, premium audits, risk management or loss-control work for the insurance industry;
  • Manufactured housing salespersons;
  • Persons engaged in conducting international and cultural exchange visitor programs;
  • Competition judges with specialized skill sets;
  • Digital content aggregators who serve as licensing intermediaries for digital content;
  • Specialized performers hired to teach a master class for no more than one week; and
  • Feedback aggregators. 
  • Licensed insurance agents
  • Physician and surgeon (CA licensed)
  • Dentist (CA licensed)
  • Podiatrist (CA licensed)
  • Psychologist (CA licensed)
  • Veterinarian (CA licensed)
  • Lawyer (CA licensed)
  • Architect (CA licensed)
  • Engineer (CA licensed)
  • Private investigator (CA licensed)
  • Accountant (CA licensed)
  • Registered securities broker-dealer or investment adviser or their agents and representatives
  • Direct sales salesperson (per Section 650 of the Unemployment Insurance Code)
  • Commercial fisherman
  • Real estate licensee (CA licensed)
  • Workers performing repossession services for repossession agencies
  • Freelance Writers, Photographers, Etc.
    • Previously, under AB 5 freelance writers, photographers, photojournalists, editor, or newspaper cartoonist, who had over 35 submissions a year were subject to the ABC test.
    • AB 2257 removes that submission ceiling. It also adds new positions that qualify as a Professional Service, such as translators, content contributors, advisors, narrators, cartographers, producers, copy editors and illustrators, subject to certain conditions.
    • AB 2257 also adds requirements that the writer or photographer provide services under a contract that specifies in advance the rate of pay and intellectual property rights, and that the contractor not replace an employee performing the same work at the same volume.  In addition, the writer or photographer must not perform the work primarily at the hiring entity’s business location, and may not be restricted from working for other hiring entities.
  • Marketing, provided that the contracted work is original and creative in character and the result of which depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the contracted work
  • Administrator of human resources (provided certain criteria are met)
  • Certain travel agents
  • Graphic design
  • Grant writer
  • Fine artist
  • Services provided by an enrolled agent who is licensed by the United States Department of the Treasury
  • Payment processing agent through an independent sales organization
  • Still photographer or photojournalist who does not license content submissions to the putative employer more than 35 times per year (does not apply to motion picture work)
  • Services provided by a freelance writer, editor, or newspaper cartoonist who does not provide content submissions to the putative employer more than 35 times per year
  • Services provided by a licensed esthetician, licensed electrologist, licensed manicurist, licensed barber, or licensed cosmetologist provided that the individual:
  • Sets his or her own rates, processes his or her own payments, and is paid directly by clients;
    • Sets his or her own hours of work and has sole discretion to decide the number of clients and which clients for whom he or she will provide services;
      • Has his or her own book of business and schedules his or her own appointments; and
      • Maintains his or her own business license for the services offered to clients.
      • If the individual is performing services at the location of the hiring entity, then the individual issues a Form 1099 to the salon or business owner from which he or she rents business space.

Additionally, all of the below factors must be met for the exemption to apply to the above listed “professional services”:

  • The individual maintains a business location (may be residence) that is separate from hiring entity. The individual may choose to perform services at the hiring entity’s location;
  • If work is performed more than six months after January 1, 2020, the individual has a business license, in addition to any required professional licenses or permits for the individual to practice in his or her profession;
  • The individual has the ability to set or negotiate his or her own rates for the services performed;
  • Outside of project completion dates and reasonable business hours, the individual may set the individual’s own hours;
  • The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other customers as available to perform the same type of work; and
  • The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.

AB 5’s “business-to-business” exemption had been used by certain freelancers and sole proprietors operating in California as a way to avoid the “ABC” Test.  

AB 2257 clarifies the exemption’s requirements and, in theory, allows more flexibility in how it may be applied. 

  • A bona fide business-to-business contracting relationship, is exempt from the “ABC” test if the contracting business demonstrates that all of the following criteria are satisfied:
  • The business service provider is free from the control and direction of the contracting business entity, both under the contract for the performance of the work and in fact;
  • The business service provider is providing services directly to the contracting business rather than to customers of the contracting business;
  • The business service contract is in writing;
  • 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;
  • The business service provider maintains a business location that is separate from the business or work location of the contracting business;
  • The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed;
  • The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity;
  • The business service provider advertises and holds itself out to the public as available to provide the same or similar services;
  • The business service provider provides its own tools, vehicles, and equipment;
  • The business service provider negotiates its own rates;
  • The business service provider sets its own hours and location of work; and
  • The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required.

Note: This subdivision does not apply to an individual worker, as opposed to a business entity.

Takeaways

We recommend that businesses continue to carefully assess vendor agreements moving forward to determine whether the contracting party falls within the confines of AB 5, as amended. The trigger for that assessment is typically (though not always) the issuance of an arrangement that results in a form 1099.  We suggest that businesses conduct an immediate audit to determine whether any contracts are legitimately subject to reclassification in light of these amendments. 

The Mintz ELB group in California is available to assist your business in its AB 5 and AB 2257 compliance efforts and will continue to provide up to date analysis on laws and cases impacting the fast changing landscape of independent contractor classifications. 

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Author

Jennifer B. Rubin is a Mintz Member who advises clients on employment issues like wage and hour compliance. Her clients range from start-ups to Fortune 50 companies and business executives in the technology, financial services, publishing, professional services, and health care industries.