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AB 5 – CA’s New Independent Contractor Law – Part 2 of 3

by D. Gregory Valenza | | September 22, 2019

Hello, again.  I corrected some typos and tweaked a few things in Part 1, which you can read here. Apologies.

I was going to cover AB 5 in two posts. But I decided to give the “business-to-business” section, subdivision 2750.3(e), its own post.  So, I will finish the rest of the statute in Part 3.  

As we discussed in Part 1, section 2750.3(e) concerns contracts between businesses.  That section says:

Subdivision (a) and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions…..

As I asked last time, why are business contracts between ongoing business entities part of this law at all?   Let’s first discuss what contracts are covered.  Then we can go over whether it makes sense.  Spoiler: at least to me, it doesn’t.

First, this subdivision 2750.3 appears to apply only to service contracts.  So, business-to-business contracts that involve creating a product or manufacturing do not seem to be covered. Also, contracts between individuals and businesses are not covered by this subsection.  This provision applies only to contracts between business entities.   Finally, contracting business entities’ workers also are not evaluated for employee or contractor status under subdivision (e).  Rather, it appears these entities’ workers’ status as employees or contractors is determined under subdivision (a) (the ABC Test or an exception) just like everyone else. 

OK, now that that’s out of the way, here are the “conditions” that subdivision 2750.3(e) lays out.   Again, if the business contracting entity fulfills these conditions, it means only that the ABC Test will not apply.  Businesses that are covered by this subdivision, and which can fulfill the conditions will be evaluated under the “Borello” test.   (I went over the ABC Test and the Borello test in Part 1).

(A) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

[This is simply the right to control, which is the “A” in the ABC Test and part of Borello.]

(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.

[So, let’s say that Company A provides banquet waitstaff to hotels.  Hotel X contracts with Company A for banquet waitstaff.  It is possible Company A and Hotel X will have a contract that is evaluated for independent contractor status under this section  But Hotel X also contracts with Company B to launder its sheets.  Company B’s contractual relationship with Hotel X is not covered by this subsection.  Similarly, IT services, accounting services, plant watering, package delivery, in-house mailroom workers, and the like, are not.]

(C) The contract with the business service provider is in writing.
(D) 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.
(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.
(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(G) The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
(I) The business service provider provides its own tools, vehicles, and equipment to perform the services.
(J) The business service provider can negotiate its own rates.
(K) Consistent with the nature of the work, the business service provider can set its own hours and location of work.
(L) The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

As you can see, some of these overlap with Borello.  Also, please see the “gimmes” like the business license, the written contract, and the like that can mean the difference between the ABC Test and the Borello test.

So, all that said,  we have to deal with the very confused, and quite possibly bored, elephant in the room: Does Section 2750.3(e) say that the ABC Test could determine whether a business is an “employee” of another business, if the businesses do not satisfy the conditions contained in section 2750.3(e)?

Well, this subdivision (e) states that “subdivision (a)” will apply to the contracting business unless certain conditions are met.  Subdivision (a)  says that “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity” can pass the ABC Test.  

Subdivision (e) also refers to “the holding in Dynamex” as applicable to businesses that do not satisfy its conditions.  “The holding in Dynamex” is that the ABC Test determines if someone is an independent contractor or an employee under the Industrial Welfare Commission Wage Orders. 

So, yes, it seems the Legislature wishes to apply the ABC Test or at least Borello to nearly every service business relationship between two entities. Of course, a court may then decide that the two businesses are “independent” rather than in an employer-employee relationship  But there is risk that a court will find that one business is the “employee” of another because of this subdivision (e). 

That just doesn’t make sense, does it?  Maybe you’re thinking “what about a business of just one person who sets up a corporation?”  Well, the Legislature was not talking about individuals in subsection (e). They say so right in 2750.3(e)(2):

This subdivision does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a contracting business 

And, like I said, the Legislature also is not talking about employees of the contracting businesses either, because they said so right in 2750.3(e)(3)

(3) 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 paragraph (1) of subdivision (a).

So, if a corporation cannot satisfy the conditions in 2750.3(e), and it’s an “employee” under the ABC Test (or even under Borello for that matter) how will that work?  How will one multi-employee business be an “employee” of another multi-employee business for purposes of the Wage Orders?  For instance, The Wage Orders set certain standards between employers and employees, concerning things like overtime, reporting time pay, meals, rest periods, and the like.  Does that mean that when a business contracts with another business, the fees due are “wages” that must be paid semi-monthly? How does one give a contracting entity rest periods?  No, I am not being sarcastic. This simply makes no sense in context.  

Perhaps the courts will have better luck trying to figure this out.  If not, the Legislature added this safety valve to the final version of the bill:

If a court of law rules that the [ABC Test] cannot be applied to a particular context based on grounds other than an express exception to employment status as provided under paragraph (2), then the determination of employee or independent contractor status in that context shall instead be governed by the California Supreme Court’s decision in [Borello]. 

Even still, though, whether Borello or the ABC Test governs the determination, the point is that a bona fide multi-employee business is not an “employee” of another business for purposes of wage-hour law.  Is it?  I guess we’ll have to see.

Maybe I’m missing something.  Or maybe the Legislature will clarify this section with follow-up amendments.  To that end, here is an excerpt from the final Senate Floor Analysis issued right before the final vote. It captures the commitment to precision, the dedication to quality, and the deep respect for English prose that one would expect to see in a law that drastically alters employment relationships in California, among the largest economies on the globe:  

As with any complex legislation, it is the norm that future clean-up legislation is necessary to sand down the rough edges and diminish the unseemly gap between the written word of legislation and the hazy hieroglyphics of everyday California. AB 5 is no exception. 

Put another way: “Hey, YOLO, amiright?” What does that statement even mean?  Anyway, one can hope that they clean up this business-to-business section along with the other errors they pointed out in their final floor analysis. 

In the meantime, businesses should consider the risk of employment claims arising from business-to-business contractual relationships.  It is too early to know whether waivers of section 2750.3(e) will hold up. Maybe  not, given anti-waiver provisions contained in the Labor Code. However, corporations drafting their business-to-business agreements may wish to consider taking into account this section when addressing indemnification provisions, and ensuring there is adequate insurance coverage.

Well, that’s enough about the business-to-business provision. In Part 3 of this post, we will handle the remaining substantive provisions of AB 5, and I will share some additional observations about compliance.  

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