Independent Contractors: What’s New for 2021?

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Independent contractors have long been invaluable for businesses who can’t always employ a full staff, and it’s common for situations to pop up in which employers can’t spare a regular employee’s time to work on one-offs, seasonal jobs, or specialized tasks—to name a few examples.

The rub is that they also can’t afford to hire a new employee, making the freelancer a mainstay across thousands of industries. Typically, the employer enjoys quality, professional work at a guaranteed rate, while the contractor benefits from the flexibility and volume of potential freelance jobs.

In California, however, there have been recent changes in the relationship between independent contractors and businesses.

To understate matters, the changes have been rocky.

AB 5 and the ABC Test

2020’s AB 5—a new codification for the test that determines employee status—rubbed thousands, if not millions, of freelancers and employers the wrong way as it applied qualifications inconsistently across industries. This prevented many workers from being able to contract out enough jobs to sustain a freelance employment, and it also limited employers’ access to their most reliable independent contractors.

This all stems from the expansion of the existing standard test for independent contractor classification into what is known as the “ABC Test”: a three-part standard meant to determine whether a contractor should be considered an employee or not, and to establish exemptions. The basics are somewhat simple. To successfully defend against employee misclassification in the case of an independent contractor, there must be proof that:

illustration of a frustrated woman on her laptop
  • “the worker is free from control and direction of the hiring entity in connection with performing the work, both under contract and in fact,
  • the worker performs work outside the usual course of the hiring entity’s business, and
  • the worker customarily engages in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.”

Seyfarth Shaw LLP explains the immense new reach of AB 5 nicely, noting that it made the ABC Test “the default test for all Labor Code, Unemployment Insurance Code, and Wage Order claims. As a result, the ABC Test extended to a host of additional causes of action not previously covered, such as, for instance, claims for failure to reimburse necessary business expenses and for failure to provide accurate wage statements.”

On top of that, AB 5 opened up potential enforcement litigation against employers and workers—meaning that if the Attorney General or some city attorneys thought you might be misclassifying your independent contractors, they now had the power to seek injunctions against you. If you couldn’t pass the ABC Test, or if you didn’t own a business in an exempt industry, you’d be liable. So, clearly, AB 5 did not work for everyone in 2020.

What’s New

Meet AB 2257, which is law as of September 4. This new legislation doesn’t scrap AB 5 entirely; in fact, it maintains the ABC Test as the default way to prove employee classification in the case of independent contractors. However, it does introduce a slew of new statutory exemptions, which should serve to widen the pool of workers who can once again remain qualified as independent contractors.

Some of the main exemptions:

BusinesstoBusiness Exemption

A holdover from AB 5, this exemption applies to “business-to-business contracting relationships.” It means that a contractor—defined here as a sole proprietor, LLC, LLP or corporation—will be exempt from the ABC Test when they contract with another business. The new twist is that businesses may now also contract out to public agencies or quasi-public corporations as well.

Single-Engagement Business-to-Business Exemption

Key here is a stipulation of “no more than once a week” for stand-alone, non-recurring events in a single location or a series of events in the same location. The ABC Test would not apply in such a contract, assuming both parties meet specific criteria including the hiring party’s lack of control over the contractor’s work and a written contract specifying pay. The contractor must also maintain their own business location that is not the same as the hiring party’s.

Referral Agency Exemption

This is one of the largest areas of expansion in all of AB 2257, broadening the scope of exemption from the ABC Test immensely. The key point here is that the business is one that refers a contractor’s services to its own clients. So, for example, a wedding planner may refer out emcee duties to a sole proprietor who runs his own DJ company—the wedding planner’s hiring relationship with the DJ would be exempt from the ABC Test, expressly ensuring the DJ is not considered an employee.

Professional Services Exemption

This expansion returns many occupations to exemption consideration under the common-law test of employment. In other words, AB 5 essentially restricted freelancers—especially content contributors (journalists, photographers, videographers, writers, etc.)—to hard submission caps and, if that cap was surpassed, their client would be forced to either classify the contractor as an employee or cease contracting out work. AB 2257 removed that cap and replaced it with a requirement stating that businesses who frequently use independent contractors may not displace existing employees in order to use contributors instead.

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Music Industry and Performer Exemptions

Ever the wide-ranging bastion of culture and art, California of course has a music industry and performer exemption. It is, admittedly, rife with specifics and details about who is and isn’t exempt from the ABC Test—mostly, individuals who do not receive royalties are exempt, BUT must still be paid applicable minimum wage and overtime as if they were employees. There are finer points still, but since those tend to be more niche than this space is intended to be, we’d direct you back to Seyfarth’s excellent breakdown of the exemption.

More Power

Another addition AB 2257 provides has nothing to do with exemptions at all, but rather, creates a sort of tradeoff for them: While fewer businesses and contractors may now have to face the ABC Test because of the introduction of so many exemptions, the government has greater power to enforce employee misclassification. Now, district attorneys can file injunctions against businesses they suspect of such behavior.

The Devil’s in the Details

As we see it, the general takeaway is that AB 2257 makes it easier for an independent contractor to resume their relationships with their clients as usual without risk of being considered an employee. However, every situation is unique—this blog is not to be considered as legal advice. If you are unsure, you should consult with legal counsel before entering into an agreement with any independent contractor.

We will continue to stay informed and tuned in to any other legislation that may affect who you must and must not consider as an employee. We are here to help!

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