The New Law on the Block for Independent Contractor Agreements

This September, even California employers have to go “back to the books” when hiring and contracting with independent contractors. As if we didn’t have enough change to navigate already, the rules around independent contractors have changed once more.  So break out your highlighters and follow along as we walk you through some key updates and recommend the next steps.

On September 4, 2020, Assembly Bill No. 2257 (“AB-2257”) became law, revising the prior law outlined in Assembly Bill No. 5 (“A-B5”) in two significant ways. First, it added several new professions to the exemptions list. Second, it set new requirements around existing exemptions previously found in AB-5.  

As a result, companies that engage independent contractors should take this time to: 1) Review how they classify employees vs. independent contractors; and 2) Revisit their independent contractor agreements to ensure continued legal compliance.

Which Test: ABC or Borello?

Under California law, there are two potential tests for determining independent contractor status: the ABC Test or the Right to Control Test (Borello). 

According to the ABC Test, a person providing labor or services for pay is considered an employee rather than an independent contractor unless all three of the following factors are met: 

  1. the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work;
  2. the person performs work that is outside the usual course of the hiring entity’s business; and
  3. the person is customarily engaged in an independently established trade, occupation, or business.

The Borello case, which preceded AB-5, outlines the alternative “Right to Control Test.” Under Borello, if the hiring entity has the “right to control” the person providing the services (determined by evaluating a long list of requirements), the person is an employee. 

AB-2257 upholds the ABC Test as the general rule. If an exemption applies, then according to AB-2257, the less stringent Right to Control Test should be used to determine independent contractor status. So the first question to determine is – which test applies to your analysis of independent contractor status?

Exemptions

Determining if an exemption applies is vital to the independent contractor analysis because it determines which test applies. The new AB-2257 significantly increases the number of exemptions with application across many industries.  In addition, there are key exceptions for business relationships and referral agencies that provide independent contractors. 

Notably for the entertainment industry, AB-2257 addresses the independent contractor status of musicians, various professionals in the music recording industry, writers, photographers, videographers, photo editors, and illustrators.  

For example, photographers can be exempt from AB-2257 provided the photographer’s independent contractor agreement meets these requirements: 1) it must specify the rate of pay and an obligation to pay by a defined time; 2) it may not require that the individual work only for that company; and 3) it must not have the individual working primarily at the business location.  Further, the hiring company cannot use the photographer to directly replace an employee who performed the same amount of work. If these requirements are met, then the photographer would be considered exempt from AB-2257. That means the strict ABC Test would not govern the photographer’s independent contractor status. Instead, the more lenient Right to Control Test would apply.  

Tips for Contracts Professionals

As a contracts professional, it is obviously important to read the law.  But, in the meantime, here are some tips to get you started when dealing with independent contractor agreements in your daily work.

  • Determine if your independent contractors fall under a new exemption.  Get out your highlighter and identify the exemptions relevant to your company or industry. 
  • Update independent contractor agreements with required clauses.  Make sure the contractual terms required by AB-2257 are included in your independent contractor agreements.  Key contractual terms may vary depending on the profession or industry.  
  • Partner with stakeholders to reduce internal risk. Mitigate the easy or apparent risks by discussing this new law with your HR, legal, and procurement teams, and involve the departments that tend to hire contractors. For high risk or high-frequency independent contractors, consider contacting a specialist in employment law who can review your standard contract template and provide improvements, or suggest other ways to receive the services without running afoul of AB-2257. 
  • Consider alternative contractual arrangements.  Consider contracting with a “bona fide” business entity, as the rules for business entities are different than rules for working with individual people.  For example, if an independent contractor has formed an LLC and legitimately runs her own business, and you have a written contract with her that specified the payment amount and due date, the ABC Test does not apply.  Note that it’s not enough for the contractor to just have an LLC in name only and still function essentially as your employee–she must meet 12 requirements under AB-2257 Section 2776, such as maintaining a business location, providing her own tools and equipment, setting her own hours and location of work, and advertising and holding herself out to the public as available to provide those services.  Depending on the situation, it may be beneficial to make your independent contractors aware of these requirements so you can continue contracting with them in compliance with the law.

Overall, this new law is certainly worth your time and attention as a contracts professional in California.  So grab a highlighter, get to reading, and be prepared for a test!

Anna Makowski Morkos currently serves as Corporate and Compliance Counsel for Jafra Cosmetics International, Inc, a multi-national cosmetics company. In her 7 years as an attorney, she has quietly “nerded out” on contracts by herself, and is delighted to now have a place in which to connect with fellow contract nerds.

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