Increasing Unbiased Contractors in California: New Legislation Awaits Governor’s Signature

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As we previously reported, California law uses the "ABC" test to determine whether employees are employees or independent contractors for the purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission contracts.

Applicable law under AB 5 exempts certain professions and business relationships from the use of the ABC test and instead provides that those exempted relationships are subject to the traditional multi-factor test described in SG Borello & Sons, Inc. versus Department of Industrial Relations (1989 ) 48 Cal. 3d 341.

Under AB 2257, which was passed by California legislature Monday night, these exemptions would be amended and expanded to cover several additional professions and industries. The bill is now on Governor Newsom's desk for signature.

Below we have listed the main changes proposed by AB 2257. However, the proposed changes to AB 5 are very detailed and complex. If your company or profession seems to fall under one of these exemptions, we strongly recommend that you contact your lawyer as the understanding of this complex topic is nuanced and the wide variety of penalties that can be imposed for violations. Although the CARES Act provides unemployment benefits to independent contractors, many independent contractors' unemployment claims have led directly to investigations by the EDD as to whether the person was properly classified. The EDD has proactively identified that independent contractors have been misclassified.

Current exceptions according to AB-5

Existing exemptions under AB-5 include individuals who meet certain criteria and provide services in certain circumstances, including the following:

  • Physicians, including physicians, surgeons, dentists, podiatrists, veterinarians and psychologists;
  • Licensed professionals including lawyers, architects, engineers, hairdressers, hairdressers, beauticians, electrologists, and manicurists;
  • Financial service providers including insurance brokers, accountants, securities dealers and investment advisors;
  • Real estate agent;
  • Direct sellers, provided that remuneration is based on actual sales rather than wholesale purchases or referrals;
  • Commercial fishermen by 2023;
  • Builders and contractors;
  • Professional services including marketing, human resource administrators, travel agencies, graphic designers, scholars, and visual artists;
  • Freelance writers and photographers, provided that the employee does not contribute more than 35 contributions to a point of sale in one year;
  • Tutors; and
  • AAA affiliated tow truck drivers.

New exemptions under AB-5 when the governor signs AB 2257

AB 2257 adds a number of new exemptions to AB 5 that allow the use of the Borello test instead of the more restrictive ABC test for the following professions when certain requirements are met:

  • Recording artists, songwriters, lyricists, composers, proofers, recording artist managers, record producers and directors, musical engineers, musicians recording sound, singers, photographers working on album covers, and other press and promotional photos related to recording and independent radio stations;
  • Musicians or music groups for the purpose of a live performance event with an engagement;
  • Individual performance artist;
  • Licensed Landscape Architects;
  • Freelance translators;
  • Registered Professional Foresters;
  • House inspectors;
  • Individuals who perform underwriting inspections, premium reviews, risk management or loss control work for the insurance industry;
  • Sellers of prefabricated houses;
  • Individuals running international and cultural exchange visitor programs;
  • Competition judges with special skills;
  • Digital content aggregators serving as digital content licensing intermediaries;
  • Specialized artists hired to teach a master class for no more than a week; and
  • Feedback aggregators.

Modified Exception – Business-to-Business Exception

AB 5 provides for a so-called "business-to-business" exemption to provide relief for freelancers and sole proprietorships working in California. This exception has been criticized because of intertwined and overlapping requirements. AB 2257 tries to counter these points of criticism by revising the language to clarify the requirements of the exception and to allow more flexibility in its application.

We believe this change is a positive development as it should provide companies with more security when contracting with a reputable company with their own employer identification number rather than paying a sole proprietorship for their individual social security number.

Modified Exemption – Freelance writers and photographers

Under AB 5, a freelance writer or photographer would automatically become an employee of a publishing house if he or she were contracted for more than 35 submissions in a single year. AB 2257 removes the limit of 35 submissions per year, but adds requirements that the author or photographer provide services under a contract that pre-sets compensation and intellectual property rights and that the contractor has an employee who who does the same work, not replaced at the same volume. In addition, the author or photographer may not perform the work primarily at the landlord's company location and must not be prevented from working for other landlords.

That being said, it's important to note that the issue of classifying workers and independent contractors is made more difficult by the fact that some workers who would normally be classified as independent contractors under the common law test are classified as workers for certain taxes under California law will only. For example, someone hired to write a commissioned work under a written contract identifying the work as a “rental work” is subject to the provisions of Sections 621 (d) and 686 of the California Unemployment Insurance Code relating to withholding Unemployment insurance and state disability insurance deal with, but not withholding tax. Payments to the author are reported on Form 1099-MISC.

Changed exemption – recruitment agencies

AB 5 created an exception for “remittance agencies” which was subjected to an extensive and rather complicated multi-factor test. AB 2257 revises the criteria by which referral agencies and service providers are excluded and clarifies the applicable definitions. The bill also expands the types of services that the referral agency exception can use to include advice, youth sports coaching, caddying, wedding planning, wedding and event provider services, and interpreting and interpreting services from a certified service provider, one of several specified agencies. In the invoice, the term “including, but not limited to,” is used to determine coverage, thereby extending the scope of this exception to those not specifically listed. On the other hand, AB 2257 lists a handful of services that do not specifically qualify for the "referral agencies" exception, including high risk industry services, janitorial services, delivery, courier services, transportation, trucking, farm workers, retail, logging and home care services as well as other construction services than minor home repairs.

Takeaways

Going forward, we encourage all California companies to develop an internal process or checklist to ensure that workers are properly classified as workers or independent contractors. Given the complexity of this topic, we recommend that your legal advisor review these processes and checklists to ensure that all applicable laws and relevant best practices are followed. We also encourage you to update existing agreements with independent contractors in light of the evolving landscape. Finally, be sure to stay abreast of new laws and cases regarding independent contractors as this subject is currently changing.

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