AB 2257: California Rewrites Independent Contractor Law…Again

Kelly O. Scott | ECJ Blogs

As promised, Governor Newsom signed Assembly Bill 2257 which effectively rewrites Assembly Bill 5, the flawed law which sought to codify and clarify the California Supreme Court’s ruling in Dynamex Operations West, Inc. v. Superior Court and took effect on January 1, 2020.  AB 2257 became effective upon signature.

At approximately 14 pages in length, neither employees nor employers are likely to find AB 2257 any less confusing than its predecessor.  It does, however, make it easier for several categories of professions to work as independent contractors if certain conditions are met.  The bill also removes a requirement that forced many individuals contracting as a business to form partnerships, limited liability companies, or corporations rather than act as sole proprietors.  Further, the bill removes an important restriction that essentially made it impossible for a business to hire a subcontractor to deliver services to its customers. 

At its core, the law initially established by AB 5 remains unchanged.  AB 2257 still requires that anyone performing labor or services for pay be considered an employee unless the hiring entity can satisfy the ABC test.  The ABC test requires the hiring entity to prove that the purported contractor is: (A) free from control and direction by the hiring entity both under the contract and in the performance of the work; (B) that the work being performed is outside of the usual course of the hiring entity’s business; and (C) that the person is customarily engaged in performing work of the same nature as an independently established trade, occupation or business.

The devil, as they say, is in the details, and the details of AB 2257 provide many exceptions to the application of the ABC test.  Those exceptions each provide that in the event the ABC test cannot be applied in a particular circumstance, the determination of contractor status will be governed by the California Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, a 1989 case that provides a much more flexible multi-factor independent contractor test. 

Numerous occupations continue to enjoy an exemption from the ABC test established by AB 5.  These include physicians and surgeons, dentists, podiatrists, psychologists, and veterinarians licensed by the State of California providing services to or by a healthcare entity.  Licensed lawyers, architects, engineers, private investigators, and accountants are also excluded, as are security broker-dealers, investment advisors, certain direct salespersons, real estate agents, repossession agencies, and commercial fishers working on American vessels (until January 1, 2023).  Professional services persons working as enrolled agents, travel agents, processing agents, or in the areas marketing, human resources, graphic design, grant writing, and fine arts can be exempt provided certain conditions are met.  Construction subcontractors, licensed estheticians, licensed electrologists, licensed manicurists (until January 1, 2022), licensed barbers and licensed cosmetologists meeting certain defined criteria are excluded from the ABC test.  The exception for newspaper carriers continues but is still set to expire on January 1, 2021 (so you can expect to pay more for your newspaper soon!). 

AB 2257 adds photographers, photojournalists, videographers, and photo editors who meet defined criteria, along with landscape architects, real estate appraisers, home inspectors, professional foresters, and manufactured housing salespersons to the list of those not subject to the ABC test.  AB 2257 also creates new exceptions for international exchange visitors, specialized performers teaching a master class, and competition judges, including amateur umpires and referees. 

A new exception to the ABC test is the relationship between a data aggregator and an individual providing feedback to the data aggregator, provided that any consideration for the feedback is paid at a rate equivalent to or greater than the minimum wage, and provided the individual is required to exercise independent judgment and discretion in giving the feedback, is free from control and direction by the data aggregators, and has the ability to reject feedback requests without being penalized.

Additional important exceptions created by AB 2257, and a primary motivation for the statute itself, apply to various media-related professions and entertainment events.  In particular, the Borello test is to be applied to all of the occupations included in connection with creating, marketing, promoting or distributing sound recordings or musical compositions such as recording artists, songwriters, lyricists, managers, record producers, directors, musical engineers, musicians, vocalists, photographers, radio promoters, and publicists, but not including film and television crews.  There is also a general exception for musical groups or musicians for the purpose of single-engagement live performance events where the group is a headliner at a venue with more than 1,500 attendees or is performing at a festival that sells more than 18,000 ticket tickets per day.  Individual performance artists performing material that is original and creative in character and the result of the individual’s own invention, imagination, or talent, can also be exempt from the ABC test if other conditions are satisfied

The statute creates a more general single-engagement event exception which allows for individuals to work together to create a single event, or a series of events in the same location no more than once a week, provided neither individual controls the other, that each can negotiate the rate of pay, that there is a written contract between them, that they each have their own business location (which may include the individual’s personal residence), that they have the required license or a tax registration, that they are customarily engaged in the same type of work and are free to work for other businesses in performing the same or similar services.

Additional occupations for which the Borello test will be applied include freelance writers, translators, editors, copy editors, illustrators or newspaper cartoonists, as well as content contributors, advisers, producers, narrators or cartographers, who work under written contract that includes the rate of pay, intellectual property rights, an obligation to pay by a defined time, and provided the individual performing the services is not directly replacing an employee who performed the same work for the hiring entity.

The professional services and business-to-business exceptions created by AB 5 are preserved and now allow for individuals acting as sole proprietors to engage as independent contractors.  The same is true for the previously established referral services exception.  Another important change to the business to business exception allows for a service provider to perform services directly to the customers of the contracting business if the service provider’s employees are solely performing services under the name of the business service provider and the business service provider regularly contracts with other businesses.  These providers must still meet the pre-existing obligations for these exceptions including having an appropriate business license or tax registration in the jurisdiction where the work is to be performed.

In addition to other remedies already available, AB 2257 adds the possibility of injunctive relief to prevent continued misclassification of employees as independent contractors in any action against a putative employer brought by the attorney general, district attorney, or a city attorney.

Connecticut Supreme Court Issues Important Clarification For Independent Contractor Test

Guy Brenner and Carolyn M. Dellatore | Proskauer | March 23, 2017

On March 21, 2017, the Connecticut Supreme Court issued an important ruling, finding that an individual may be still considered an independent contractor under the state’s Unemployment Insurance Act even if he/she only provides services to one business or entity.  In so doing, the Connecticut Supreme Court reversed a decision by the Unemployment Insurance Board finding certain workers to be employees simply because the putative employer could not show that they performed work for other companies.

Procedural Background

In Southwest Appraisal Group, LLC v. Administrator, Unemployment Compensation Act, the Plaintiff-Appellant, Southwest Appraisal Group, LLC (“Southwest”) operated an automotive appraisal company and exclusively utilized independent contractors as its appraisers.  The Connecticut Unemployment Insurance Administrator audited Southwest in 2011 and determined that certain of the contractors were in fact employees.  The Administrator assessed back taxes against Southwest, who appealed the assessment to the Unemployment Insurance Board.  The Board affirmed the Administrator’s assessment with regard to three individuals.  Southwest appealed the decision to the Connecticut Superior Court.

The ABC Test and the Trial Court’s Decision

In determining whether a worker is an employee or independent contractor for purposes of the Connecticut Unemployment Insurance Act, courts apply a three-prong “ABC test” which examines the following factors in order to determine independent contractor status:

  1. the worker is free from direction and control of the employer;
  2. the services the worker provides are outside the employer’s usual course and/or place of business; and
  3. the worker is customarily engaged in an independently established business of the same nature as the services performed. See CT General Statutes § 31-222 (a)(1)(B)(ii).

In order to be deemed an independent contractor, all three prongs of the ABC test must be met.

The trial court in Southwest determined that, while the appraisers satisfied the first two prongs of the ABC test, they were not “customarily engaged in an independently established business” because they only provided appraisal services for Southwest.  While the appraisers were all free to contract with other entities and owned their own appraisal businesses (with independently-maintained offices, equipment, and business cards) the trial court found that “there is no indication on this record that any of these three businesses would survive without their relationship with the plaintiff.”  According to the lower court, this economic dependency was dispositive to the analysis, as termination of the relationship with Southwest would “result in the unemployment of the putative employees.”

Southwest appealed the decision to the Connecticut Supreme Court.  The sole issue on appeal was whether part C of the ABC test does, in fact, require proof that the workers performed services for third parties other than the putative employer in order for them to be deemed independent contractors.

Analysis and Holding

The Connecticut Supreme Court reversed the trial court’s decision, holding that the trial court placed too much emphasis on breadth of the contractors’ client base. Rather, it held that the crux of the inquiry under part C is whether “the worker is wearing the hat of an employee of the employing company, or is wearing the hat of his own independent enterprise.”  The Court instructed that “part C must be considered in relation to the totality of the circumstances, with that inquiry guided by a multifactor test. . . . [J]ust as the mere freedom to provide services . . . for third parties is not by itself dispositive under part C . . .  whether the individual actually provided services for someone other than the employer is [not] dispositive proof of an employer-employee relationship.’’

The Court then provided a non-exhaustive list of ten factors to consider in “evaluating the totality of the circumstances under part C”:

  1. the existence of state licensure or specialized skills;
  2. whether the putative employee holds himself or herself out as an independent business through the existence of business cards, printed invoices, or advertising;
  3. the existence of a place of business separate from that of the putative employer;
  4. the putative employee’s capital investment in the independent business, such as vehicles and equipment;
  5. whether the putative employee manages risk by handling his or her own liability insurance;
  6. whether services are performed under the individual’s own name as opposed to the putative employer;
  7. whether the putative employee employs or subcontracts others;
  8. whether the putative employee has a saleable business or going concern with the existence of an established clientele;
  9. whether the individual performs services for more than one entity; and
  10. whether the performance of services affects the goodwill of the putative employee rather than the employer.

The Court added that “improper primacy” should not be attributed to “the relative size or success of the putative employee’s otherwise independent business in connection with the totality of the circumstances analysis under part C.”  Such emphasis on that particular factor would unfairly subject the putative employer to “the decisions of the putative employee and an unpredictable hindsight review,” without consideration of ‘‘the intent of the parties, the number of weekly hours the putative employee actually worked for the employer, or whether the putative employee even sought other work in the field.”

Impact

Southwest Appraisal Group, LLC v. Administrator, Unemployment Compensation Act is a welcome development for Connecticut businesses that engage independent contractors, eliminating concern over the inflexible requirement that such workers must provide services for third parties – a fact that, to the extent it is known to the principal, can change over time. Despite this favorable decision, companies should regularly evaluate their relationships with independent contractors under the “totality of the circumstances” test described above, which certainly includes consideration of whether the worker provides services to others. Employers should likewise bear in mind that the Southwest holding only addresses independent contractor classification under Connecticut’s Unemployment Insurance Act. Companies in Connecticut that utilize independent contractors need to be aware that different tests applicable under other statutes and regulations, both state and federal, remain in effect.

Illinois Strengthens Laws to Prevent Independent Contractor Misclassification in the Construction Industry

Winston & Strawn LLP – August 1, 2013

On July 23, Illinois Governor Pat Quinn signed into law two bills designed to prevent independent contractor misclassification in the construction industry. The legislation, effective January 1, 2014, amends the Illinois Employee Classification Act and enhances reporting obligations and penalties for state construction contractors.

First, H.B. 923 requires state construction contractors to file annual reports with the Illinois Department of Labor (“Department”) when a contractor pays an individual, sole proprietor, or partnership (“payee”) for construction services if the payee is not classified as an employee. In the reports, contractors must disclose:

the contractor’s name, contact information, and business identification number;

the payee’s name, contact information, and identification number; and

the amount the contractor paid to the individual in the taxable year.

If the Department determines that a contractor failed to file the required reports, the Department may impose a civil fine against the contractor. Repeat violators may be disbarred from receiving state contracts.

Second, H.B. 2649 requires the Department to notify contractors of misclassification complaints filed with the Department and creates an administrative hearing process for the Department to pursue misclassification claims against contractors. The legislation also provides that when the Department recovers a monetary penalty against contractors that misclassified workers, the Department shall distribute 10 percent of the penalty to the affected employees. Finally, the legislation creates individual liability for officers and agents of a corporation that “knowingly permit” violations of the law.

According to Governor Quinn’s office, worker misclassification results in the state losing up to $700 million in taxes and payments annually. The new laws are aimed to help the state collect money from contractors for payroll taxes, unemployment insurance, and workers’ compensation premiums.

via Illinois strengthens laws to prevent independent contractor misclassification in the construction industry – Lexology.