Assembly Bill 5 (AB 5), California’s statute governing the classification of independent contractors, underwent fundamental changes on September 4, 2020 when AB 2257 became law. The new exemptions and revisions apply to exemptions for business-to-business relationships, referral agencies, professional services, performance artists, and other classifications.

AB 5 codified the rigid “ABC” test for determining whether a worker is properly classified as an independent contractor. If the ABC test fails, the worker must be classified as an employee and provided the full complement of legal protection which employee status affords. To pass the “ABC” test, all three factors must be present:

  1. “The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract … and in fact”
  2. “The worker performs work that is outside the usual course of the hiring entity’s business”
  3. “The worker is customarily engaged in an independently established trade, occupation, or business of the same nature” as the work performed for the hiring entity

If a company is unable to demonstrate any of these three factors, then the worker is an employee, subject to a list of exceptions.

By enacting AB 2257, many more California workers were exempted from the ABC test. In all, there are now 109 categories of workers exempted from the ABC test in California under AB 2257. Notably absent from the new exemptions are the California trucking industry, the gig economy companies (although that was changed when voters supported Proposition 22), and the motion picture and television industries, despite significant lobbying efforts.

Although the ABC test still applies in many circumstances, AB 2257 establishes more flexible standards in the following areas: business-to-business relationships; referral agencies, and professional services. Moreover, it exempts additional occupations and business relationships.

Business-to-Business Relationship Exemptions. AB 5 provided an exemption for California businesses contracting with other businesses, which is one of the narrowest in the statute and has 12 conditions to apply. AB 2257 clarifies the exemption by specifying the terms required in a written contract, providing that a business service provider’s residence is a permissible place of business, and limiting the type of work materials that must be provided by the business service provider. AB 2257 also extends the business-to-business exemption to include a “public agency or quasi-public corporation” that has retained an independent contractor.

Entertainment/Music Industry Exemptions. AB 2257 creates several new entertainment industry exemptions from the ABC test, largely focused on the California music industry. Some positions are generally exempt from the ABC test, including, but not limited to:

  • Recording artists
  • Songwriters, lyricists, composers, and proofers
  • Managers of recording artists
  • Record producers and directors
  • Musical engineers, mixers, and musicians engaged in the creation of sound recordings
  • Vocalists
  • Independent radio promoters

Where musicians or performers are engaged in a one-time live performance, they are generally exempt from application of the ABC test with certain exceptions:

  • “The musical group is performing as a symphony orchestra”
  • “The musical group is performing at a theme park or amusement park”
  • “The musician is performing in a musical theater production”
  • “The musical group is an event headliner for a performance taking place in a venue location with more than 1,500 attendees”
  • “The musical group is performing at a festival that sells more than 18,000 tickets per day”

These exceptions are “inclusive of rehearsals related to the single-engagement live performance event.”

The Referral Agency Exemption. AB 5 created an exemption for businesses referring customers to providers in certain services. AB 2257 clarifies how a service provider certifies proper licensure, the freedom of a service provider to maintain its own clientele, and the ability of a service provider to set or negotiate its terms with clients as well as establishing its rates without deduction by a referral agency. For example, AB 2257:

  • Expands the type of qualifying services for the exemption, including but 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, … yard cleanup, and interpreting services”
  • Excludes services provided in an industry designated by the California Division of Occupational Safety and Health (Cal/OSHA ) as a high hazard industry, or for referrals for businesses that provide, among other things, janitorial, delivery, transportation, trucking, and in-home care services
  • Defines “client” as a person or business who utilizes a referral agency to contract for services. For a business, the services contracted for must be outside the company’s usual course of business and not otherwise provided on a regular basis by employees at the company’s location

Professional Services Exemptions. AB 5 exempted a number of professionals from application of the ABC test, including lawyers, doctors, securities broker-dealers, and certain commercial fishermen. AB 2257 adds a category of professional services to be exempted that are related to an individual’s work as a content contributor, advisor, producer, narrator, or cartographer for specified publications. AB 2257 also exempts “licensed landscape architects, specialized performers teaching master classes, registered professional foresters, real estate appraisers and home inspectors, and feedback aggregators.”

Other Exemptions. AB 2257 provides several other exemptions and clarifications, including but not limited to persons who provide “underwriting inspections, premium audits, risk management, or loss control work for the insurance and financial services industries”; home inspectors, a category added to the exemption for specified occupations governed by the Business and Professions Code; individual performance artists, manufactured housing salespersons, competition judges, and individuals engaged in international exchange visitor programs; and data aggregators and the individuals providing feedback to the data aggregators, subject to specified conditions.

What this means for employers: AB 2257 provides additional carve-outs of the rigid ABC test but does not necessarily provide safe harbors for businesses seeking to use independent contractors instead of employees for specified roles and aspects of their business. Companies are encouraged to contact qualified labor and employment counsel when bringing on new workers as either independent contractors or employees.