Revised Referral Agency Exception

Effective September 4, 2020, Assembly Bill (AB) 2257 and Labor Code section 2777 broaden the “referral agency” exception to the state’s strict “ABC” definition of independent contractors.

A referral agency is a “business that provides clients with referrals for service providers to provide services under a contract,” other than the specific services excepted under section 2777.

Service providers are sole proprietors or business entities that “agree to the referral agency’s contract and use the referral agency to connect with clients.”

A client contracting services from a referral agency may be an individual or a business contracting for services that its employees do not usually provide and that are not within its usual course of business.

Referral agency services eligible for exemption from the rigid ABC test “include, but are not limited to, graphic design, web design, photography, tutoring, consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors, minor home repair, moving, errands, furniture assembly, animal services, dog walking, dog grooming, picture hanging, pool cleaning, yard cleanup, and interpreting services.” Section 2777 provides definitions for tutor, youth sports coaching, interpreting services, consulting, and animal services.

The highlighted language means that other businesses may also qualify for the referral exemption, in contrast with the AB 5 version that limited the exceptions to an enumerated list of businesses.

However, the new law explicitly excludes from exemption “referrals for businesses that provide janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction services other than minor home repair” or OSHA or Department of Industrial Regulations high-hazard occupations.

The exemption is available to sole proprietors or business entities operating a referral agency that:

• Does not control the service provider’s work both factually and under the contract;
• Requires service providers to certify they have any required business or professional license or tax registration (referral agency must keep the documentation for three years);
• Has the service providers deliver the services under their own names, not that of the referral agency;
• Has the service providers set their own rates, with the right to accept or reject any rate and negotiate those through the referral agency or directly with the client; and
• Has service providers set their own hours with the client receiving the work.

Other requirements are:

• In contrast to the AB 5 exception, the service provider must only be customarily engaged or was previously engaged in an independently established business or trade; such provider is also no longer required to have a separate clientele but still must be free to work for other clients and agencies; and
• A service provider must have his/her/its own tools and supplies, and if required for the type of work, hold its own license from the Contractors State Licensing Board.

For any referral agency that qualifies for the exemption, the less-stringent Borello balancing test will govern whether a referred service provider is a contractor or an employee.

See also:

• California’s Newest Independent Contractor Law Part 1 – Revamped Business-to-Business Exceptions (September 17,2020)
• Gagging the Gigs – California Remodels Exceptions to Its Strict Independent Contractor Test(September 11, 2020)

• Back From the Brink – For Now – Uber and Lyft’s Last-Minute Reprieve From Order to Convert Drivers to Employees (August 27, 2020)
• Making Dynamex Retroactive – Federal Appeals Court Rules New Independent Contractor ABC Test Applies Before It Existed (May 31, 2019)
• Independent Contractor or Employee? – California Legislature Dealing with Competing Proposals to Kill or Expand New Dynamex Test (April 19, 2019)
• Independent Contractor Status? It Depends – Radically New Dynamex Test Only Applies to Certain Employee Classification Cases (November 9, 2018)

For more information, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.

Helena Kobrin

September 24, 2020