Governor Gavin Newsom signed AB 2257 into law on September 4, 2020, which immediately changed the law governing whether a business can form an independent contractor relationship with another business. The new language was added into AB 2257 in late August, which has caused this change in law to be a pleasant surprise to many.
Prior to the governor signing AB 2257 into law, California law for the most part presumes any person providing labor is an employee unless the strict Dynamex test could be met. The law contained several exemptions, including one for architects that allowed an architectural firm to form an independent contractor relationship with a licensed architect.
AB 2257 creates a business-to-business exemption to the Dynamex test, meaning the easier-to-meet Borello test applies.
AIA California is in the process or preparing a detailed Practice Advisory on this new law. Until that is available, please consult with an attorney before making any decision on an independent contractor relationship.
Also, for your information, here is the new law:
California Labor Code Section 2776.
Section 2775 and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions:
(a) If an individual acting as a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business or to a public agency or quasi-public corporation (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied:
(1) 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.
(2) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. 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 contracting business.
(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.
(b) When two bona fide businesses are contracting with one another under the conditions set forth in subdivision (a), 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 contracting business is governed by Section 2775. (c) This section does not alter or supersede any existing rights under Section 2810.3
