AB-5 Is Dead: But Don’t Get So Excited.

by Lee Goldberg

By now all should be aware of the new employee classification laws challenging California businesses (employee vs. 1099 contractor) effective January 1, 2020, known as AB-5 (Cal. Labor Code §2750.3). AB-5 codified the April 2018 unanimous ruling of the California Supreme Court in the Dynamex case.¹

Well, AB-5, or more precisely, Labor Code §2750.3, has been repealed. However, it is not quite time to celebrate.

In early September 2020, Governor Newsome signed AB-2257 into law, which came into effect immediately as an “urgency statute”. While it is true that AB-2257 repeals former Labor Code §2750.3 (AB-5), the provisions of that code section are reorganized and re-enacted with certain amendments as new Cal. Labor Code §§ 2775-2787.

Consequently, AB-2257 should be viewed more as a restructured and clarified amendment to AB-5, rather than a repeal of the challenging requirements of the statute. While some businesses will certainly benefit from the amendments, there will be no change in the requirements for most.

The three (3) general questions I have been asked regarding the changes to the law implemented by AB-2257 are:
1 – What if I previously qualified my 1099 contractors Under AB-5? If you satisfied the former AB-5 requirements for your 1099 contractors, you most likely qualify under AB-2257. No additional concerns should be raised under the new laws.

2 – What AB-2257 Does Not Do: There are no changes to the basic test as to whether the hiring party has an employee vs. 1099 contractor. This test, which has come to be known as the “ABC” test, is now codified in new Labor Code §2775.

As a reminder, the “ABC” test is a 3-prong test with respect to which all three prongs must be met to have a 1099 contractor classification. The three (3) prongs are as follows: (A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) The person performs work that is outside the usual course of the hiring entity’s business; and (C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

3 – What changes were made to the AB-5 laws: As under the prior “new” law, there are a number of specific exceptions to the “ABC” test. Most of these exceptions have not changed and are re-stated in the new law.

As before, the exceptions are not a free pass. Most have conditions and qualifications. In common to each exception is the continued requirement that the hiring meets the Borello test, one of the requirements of which is a written contract between the hiring party and service provider. ²

Some of the changes/additions to the exceptions include, but are not limited to, the following:

– Labor Code Section §2778 – This is the revised “professional services” exception. The changes are most helpful in using qualified 1099 contractors in the academics, creative media services (copywriters, editors, etc.), a wide variety of fine arts (including still photography and videography – which was a problem before), marketing and digital content aggregators, certain written media, appraisal and home inspector businesses.

– Labor Code Section §2779 – This new provision provides an exception for “single-location events” – This exception may be very useful to event planners, festival organizers and charities for their charitable events.

– Labor Code Section §2780 – This addition is very detailed and generally provides exceptions for the recording and musical performance industries.

– Labor Code Section §2782 – This addition provides an exception for “data aggregators” – mostly applicable to educational, political and public survey type companies.

– Labor Code Section §2783 – This section restates the other professions that are exempt, and adds a few others in the newspaper/publishing industry.

* DO NOT MISS THE CAUTIONARY NOTE ON THE NEXT SECTION

CAUTIONARY NOTE:

PLEASE DO NOT ALLOW MY SOMEWHAT SARCASTIC, HYPER- TECHNICAL, ARTICLE TITLE MISLEAD YOU.

Not much has changed for California businesses in general since the adoption of AB-5 (other than the fact we now have to also work through this seismic employment classification change in a post-COVID era).

California’s new employee/1099 contractor classification laws are alive and well and the State of California has made clear it intends to enforce them. The evidence is not just in the statements of Governor Newsome and various State Representatives, and through its very public enforcement actions, ³ but also as telegraphed under AB-2257 itself.

AB-2257 also amends various parts of the California Revenue and Taxation Code to make it clear that these employee definitions apply to the California Tax Code (This is where the pain will be for companies that have adverse determinations on employee misclassification challenges).

On a more comical, but no less telling, note is the importance that California’s leadership puts on AB-2257, actually calling it an “urgency statute” – really – like budgetary emergencies, wildfires, disaster relief funding, and COVID?

If you use 1099 contractors in your business, I strongly advise, at the very least, you obtain a professional assessment of your compliance, compliance strategies, and financial exposure for non-compliance, with new Labor Code §§ 2775-2787.

Your legal counsel and HR Specialists will be familiar with the issues and can offer consultation and options. But at least, know your business exposure.

¹ Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 90.

² S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.

³ People of the State of California v. Uber Technologies, Inc., et. al., San Francisco Superior Court, Case No. CGC 20584402; Garcia-Brower v. Mobile Car Wash, Inc., Los Angeles Superior Court, Case No. 20STCV24800.