Revamped Business-To-Business Exceptions

Effective September 4, 2020, Assembly Bill (AB) 2257– through Labor Code section 2776 – modifies and expands exemptions for bona fide business-to-business contracting relationships from the severe ABC independent contractor test. The more-forgiving Borello multi-factor balancing test will continue determine contractor vs. employee status for such associations.

A business entity providing services (the “service provider”) to another business entity (the “contracting business”) can fall within AB 2257’s modified business-to-business exception if each enterprise is a sole proprietorship, corporation, partnership, limited liability company or limited liability partnership.

To qualify for the exemption, AB 2257 also provides:

• Under the previous AB 5 standard, the service provider had to provide services directly to the contracting business rather than to its customers. AB 2257 now permits the service provider’s employees to deliver such contracted services directly to the contracting business’ customers so long as they do so under the service provider’s name and the service provider regularly contracts with other businesses. For example, if properly structured, a custom blinds company can now maintain its independence if hired by an interior designer to install window treatments for the designer’s clients.
• The service provider’s written contract must now specify the payment amount, rate of pay and due date.
• The service provider must still maintain its own separate business location, which may now include a personal residence.
• Prior law required a service provider company to be concurrently engaged in multiple contracts with other businesses in order to maintain the business-to-business exception to AB 5. The new law merely states the service provider must be allowed to contract with other businesses without restrictions. Thus, a service provider working exclusively on a large job for a single contracting business does not have to literally perform work for other businesses simultaneously to qualify for the exemption.
• Prior law required the service provider to provide its own tools, vehicles and equipment. The new law is not so strict, recognizing that a service provider may use some of the contracting business’s resources without losing its independence. For example, an IT service provider might well have access to and utilize the contracting company’s office equipment and proprietary software to troubleshoot and resolve a computing problem.

The service provider must also:

• be free from the contracting business’s control and direction both under the contract and in fact;
• be customarily engaged in an independently established business of the same nature as the work performed;
• advertise and hold itself out to the public as available to provide the same or similar services;
• negotiate its own rates and set its own hours and location of work;
• obtain any required business license and/or tax registration; and
• refrain from performing construction-type work that requires a license from the Contractor State Licensing Board. (Independent contractor exemption from the ABC test in the construction trades is subject to another set of rules; to be covered in a future article.)

New “On-Site” Services Exception: AB-2257 also creates a new “on-site services exception” to the ABC test when two businesses contract to provide services at “single-engagement events,” i.e., a stand-alone non-recurring event in a single location or a series of events in the same location no more than once a week. Properly structured, this would permit a caterer or stand-up entertainer to maintain independence from an event producer while serving or performing for guests. See, Labor Code section 2279.

This on-site exception applies for any type of single-engagement services except those provided in certain industries deemed “high-hazard” or at high risk of independent contractor misclassification including, for example, specific agricultural, construction, delivery, transportation/trucking and manufacturing pursuits as well as some healthcare and social assistance businesses such as in-home care and psychiatric hospitals.

To meet this on-site, single-engagement exception, the parties must be at arms-length, thus free from the other’s direction and control, able to negotiate pay rates, operating from separate business locations, providing their own tools, obtaining any required business license and/or tax registration, customarily engaging in the same or similar type of work or holding themselves out to potential customers as available to do so, and being permitted to contract with other businesses for similar services and maintaining their own clientele without restrictions.

AB 2257’s modifications, additions and clarifications should make it easier for many more businesses to legitimately contract with other businesses while avoiding the rigid ABC test. Any such arrangement should of course be carefully stated in writing as well as performed consistent with these new criteria.

See also,

• 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.

Cindy Bamforth

September 17, 2020