Assembly Bill 5 (“AB 5”) adopted the three-prong ABC test from Dynamex Operations W. Inc. v. Superior Court (2018) 4 Cal.5th 903 for determining whether a worker is an employee or an independent contractor for purposes of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission. AB 5 set forth several exemptions from the ABC classification test, including one for business-to-business relationships, in which the common-law control test for classification established in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 governs.
At the time AB 5 became law in January 2020, there was significant confusion as to whether AB 5 applied to public agencies because it did not expressly state whether it applies to public employers and instead merely made the new ABC test for classification applicable to all Labor Code and Unemployment Insurance Code provisions. We concluded that there was a strong argument AB 5 does not apply to public employers under most, if not all, provisions of the Labor Code but that it likely did apply to public employers’ obligations under the Unemployment Insurance Code.
For more information, see Jon Holtzman, “Does AB 5 Apply to Public-Sector Employers? Lawmakers Aren’t Finished,” California Employment Law Letter (Feb. 24, 2020).
Recent attempts in Sacramento to clarify aspects of AB 5 may have created even more confusion on whether, and to what extent, AB 5 applies to public employers. In September 2020, the Legislature passed and the Governor signed AB 2257, a piece of clean-up legislation intended to clarify several aspects of AB 5. Because the bill is an urgency measure, it went into effect immediately.
AB 2257 revises several of the exemptions in AB 5, including—most notably with respect to public employers—the exemption for “bona fide business-to-business contracting relationship[s].” Although AB 2257 makes it easier to qualify for this exemption, it also uses language that could be used to argue that AB 5 as a whole applies to public employers in the first place.
Under AB 2257, the ABC test does not apply and instead the Borello test governs when an “individual acting as a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership, or corporation” (a “business service provider”) “contracts to provide services … to a public agency or quasi-public corporation” and the public agency or quasi-public corporation “demonstrates that all of the following criteria are satisfied”:
(1) The business service provider is free from the control and direction of the [public agency or quasi-public corporation] in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(2) The business service provider is providing services directly to the [public agency or quasi-public corporation] rather than to customers of the [public agency or quasi-public corporation]. This subparagraph does not apply if the business service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.
(3) The contract with the business service provider is in writing and specifies the payment amount, including any applicable rate of pay, for services to be performed, as well as the due date of payment for such services.
(4) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
(5) The business service provider maintains a business location, which may include the business service provider’s residence, that is separate from the business or work location of the [public agency or quasi-public corporation].
(6) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(7) The business service provider can contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.
(8) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
(9) Consistent with the nature of the work, the business service provider provides its own tools, vehicles, and equipment to perform the services, not including any proprietary materials that may be necessary to perform the services under the contract.
(10) The business service provider can negotiate its own rates.
(11) Consistent with the nature of the work, the business service provider can set its own hours and location of work.
(12) The business service provider is not performing the type of work for which a license from the Contractors’ State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.
(Lab. Code, § 2776; see also id., § 2785, subds. (b) [providing that section 2776 applies retroactively to relieve employers from liability to the maximum extent permitted by law].)
Thus, the public employer would have the burden of meeting each of the criteria set forth above to invoke this exemption. This is a seemingly tall order, although many of these factors bleed into the standard that already governs under Borello. Under Borello, the primary question is “the degree of a hirer’s right to control how the end result is achieved” and the “strongest evidence of the right to control is whether the hirer can discharge the worker without cause, because the power of the principal to terminate the services of the agent gives him the means of controlling the agent’s activities.” (Ayala v. Antelope Valley Newspapers, Inc. (2014) 59 Cal.4th 522, 529, 3 citing Borello, supra, 48 Cal.3d at p. 350.) In addition, courts consider the following secondary factors:
‘(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.’
(Ayala v. Antelope Valley Newspapers, Inc. (2014) 59 Cal.4th 522, 532, quoting Borello, supra, 48 Cal.3d at p. 351.)
Of the 12 criteria necessary to qualify for the business-to-business exemption, number two seems like it could be most problematic for public agencies where the independent contractor provides services directly to the public. But thankfully that “subparagraph does not apply if the business service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.” (Lab. Code, § 2776, subd. (a)(2).) Regardless, whether a public agency’s contracting relationship with a sole proprietor or business meets these 12 criteria will turn on the specific facts and circumstances of each situation.
Another concern with qualifying for this exemption can be found in subdivision (b) of section 2776, which provides that when “two bona fide businesses are contracting with one another under the conditions set forth” above, “the determination of whether an individual worker who is not acting as a sole proprietor or formed as a business entity, is an employee or independent contractor of the business service provider or [the public agency or quasi-public corporation] is governed by” the ABC test set forth in Dynamex. (Lab. Code, § 2776, subd. (b) [emphasis added].) This could be read to require using the ABC test to determine whether individuals who work for businesses that provide services to public agencies are also employees of the public agencies. But we think the better way to read this provision is that it requires (1) using the ABC test to determine whether individuals who work for such businesses and are not sole proprietors are employees of those businesses and (2) using the ABC test to determine whether individuals who work directly for public agencies and are not sole proprietors are employees of the public agencies. It does not, in our opinion, provide a basis for making public agencies joint employers of individuals working for businesses that provide services to the public agencies.
The legislative history supports this interpretation. A Senate Floor analysis provides that the bill “[c]larifies that, when two bona fide businesses are contracting with one another under the business-to-business exemption, the determination of whether an individual working for a business service provider is an employee or independent contractor of the business service provider is governed by the existing ‘ABC’ test.” (AB 2257 (2019-2020 Reg. Sess.) Senate Floor Analysis (Aug. 26, 2020) at p. 2 [emphasis added].)
For public employers, this could certainly be a mixed bag. On the one hand, this language may suggest that AB 5 now applies to public employers since public agencies are expressly called out in one of the primary exemptions to the law. One could infer that the the presence of this language could bolster the case that AB 5 applies to public agencies in the first place because there would be no need for an express exemption for them if AB 5 didn’t apply to them. Indeed, one of the bill analyses provided that, among other amendments, AB 2257 would “[c]larify that business-to-business contracting section also applies to public agencies and quasi-public corporations.” (AB 2257, Senate Appropriations Committee Bill Analysis (Aug. 20, 2020) at p. 1.)
On the other hand, although the business-to-business exemption requires satisfying several conditions, many of these are not meaningfully different from the Borello standard and AB 2257 does make it easier to invoke this exemption than AB 5 originally did. At a minimum, this gives public employers a clear safe harbor for complying with whichever provisions of AB 5 are ultimately deemed to apply to public agencies.
So where does that leave public employers? We think that public agencies may still take the position that this exception merely applies for purposes of those Labor Code provisions (e.g., workers compensation) or Unemployment Insurance Code provisions that already apply to public employers. Put another way, the fact that public agencies can take advantage of the business-to-business exemption in the limited circumstances in which the Labor Code does govern their conduct does not mean that public agencies are suddenly subject to provisions of the Labor Code that were never intended to apply to them. However, it will take some time before a court provides any clarity on this front. In the meantime, public agencies should consider analyzing their contractual relationships in order to forecast and mitigate against the risks associated with Labor Code section 2776.
Renne Public Law Group (RPLG) practices throughout California, advising and advocating for public agencies, nonprofit entities, individuals and private entities in need of effective, responsive and creative legal solutions. RPLG’s lawyers provide the tools to strengthen and preserve public services, empower policy makers to further their objectives and collaborate with in-house staff to identify workable solutions to complex problems, develop strategy and implement solutions