Assembly Bill No. 2257, CHAPTER 38
An act to add Article 1.5 (commencing with Section 2775) to Chapter 2 of Division 3 of, and to repeal Section 2750.3 of, the Labor Code, and to amend Sections 17020.12 and 23045.6 of, and to add Sections 18406, 21003.5, and 61001 to, the Revenue and Taxation Code, relating to employment, and declaring the urgency thereof, to take effect immediately.
[ Approved by Governor September 04, 2020. Filed with Secretary of State September 04, 2020. ]
WHAT IS AN INDEPENDENT CONTRACTOR?
In order to understand AB 2257, it is important that you first are familiar with what an independent contractor is. An independent contractor is a self-employed person or entity that is contracted to perform services or work for another entity as a non-employee. Some important distinctions between an independent contractor and an employee are:
- The entity employing the independent contractor does not have to provide benefits, like health insurance or retirement, to the independent contractor.
- Independent contractors must fund their own healthcare and retirement.
- It is up to the payer to correctly class the payee as an independent contractor or an employee.
- Independent contractors do not have income withheld from their paycheck for Social Security and Medicare, and must rather pay a “self-employment tax”.
- Independent contractors can use business expenses to reduce their taxable income.
PURPOSE OF AB 2257
AB 2257 revises AB 5, which codified the ruling in California Supreme Court Case Dynamex Operations West Inc. v Superior Court, in two main ways:
- AB 2257 makes it easier for certain professions to work as independent contractors
- AB 2257 removes the requirement that individuals contracting as a business form a partnership, LLC, or corporation, rather than a sole proprietorship.
The core law of AB 5 remains unchanged – any person performing labor or services is classed as an employee, unless the hiring entity can prove the worker satisfies the requirements of the ABC test.
THE ABC TEST
The ABC test is a three-part test that determines if workers are employees or independent contractors, and requires that in order to be classed as an independent contractor:
A. The person or entity hired is free from control and direction of the hiring entity with regards to the performance of their work;
B. The person or entity hired performs work outside the usual scope of the hiring entity’s business;
C. The person or entity hired is customarily engaged in an independently established trade, occupation, or business.
EXCEPTIONS TO THE ABC TEST
Under AB 5, certain occupations and business relationships do not have to satisfy the ABC test to qualify as independent contractors and instead be evaluated under the “Borello” test stemming from S.G. Borello & Sons, Inc. v Department of Industrial Relations (1989) which is generally regarded to be more flexible and independent contractor friendly. AB 2257 edits, expands upon, and clarifies exceptions set out in AB 5.
AB 5 and AB 2257 set out numerous professions to be exempted from the ABC test and instead governed under the Borello test when it comes to classing as independent contractors. AB 5 exempted professionals such as lawyers, doctors, securities brokers, commercial fishermen, real estate agents, and more. AB 2257 expands on AB 5, bringing the total number of exempted professions to 109 different occupations, especially focusing on freelance creative workers, the entertainment industry, referral agencies, and adding more professional services to the list. Sole proprietorships are now allowed to act as independent contractors as well.
AB 2257 adds the remedy of injunctive relief to a list of possible remedies for misclassification of employees as independent contractors in an action against a purported employer.
Contact Legal Professional
You and your company should seek legal advice on employment decisions, employee classifications, representation in administrative proceedings, reviewing documents, contracts and agreements, and handbooks and policies. If you have any questions, please contact Attorney Devin Mikulka.