Understand how California AB2257 impacts AB5 and compliance requirements for classifying 1099 workers.
California Assembly Bill 5 (AB5) went into effect on January 1, 2020, and changed how California workers are classified as either independent 1099 contractors or W2 employees. Classifying workers correctly is essential to avoid potential financial penalties and other ramifications.
AB5 applies the ABC test which lays out three conditions that must be met each worker’s independent status. The conditions are as follows:
The worker is free from control and direction.
The worker is performing work outside the usual course of the business of the hiring company.
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
California Assembly Bill 2257 (AB2257) revised and clarified aspects of AB5 and went into effect on September 4, 2020.
AB5 exempted about 50 industries from the ABC test. AB2257 adds to these exemptions by including independent contractors providing these services:
Copy editing and illustrations
Digital content and feedback aggregation
Insurance underwriting inspections, audits, and risk management and loss control
International and cultural exchange services
Manufactured housing sales
Master class performance
Real estate appraising and home inspections
Registered professional forestry
Translation of documents
B2B Contractor Exemptions
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AB5 exempts business-to-business contractors where a contractor is “acting as a sole proprietor or a business entity formed as a partnership, limited liability company, limited liability partnership or corporation contracts to provide services to another such business.” To be exempted, B2B contractors must meet 12 specific requirements and pass the Borello test. Four of the requirements have been slightly modified from the original requirements in AB5.
The requirement that the business service provider is providing services directly to the contracting business rather than to customers of the contracting business now does not apply if “if the 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.”
The requirement that 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 has been loosened to instead change the language to “can.”
In addition to AB5’s requirement that the contract be in writing, AB2257 requires that the contract must specify the amount of payment, including any applicable rate of pay and due date for payment.
The requirement that the business service provider provides its own tools, vehicles and equipment has been modified to only apply when “consistent with the nature of the work” and excludes any proprietary materials that are necessary to perform the contracted work.
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More Professional Services Exemptions
AB2257 expands the number of professional services occupations that may qualify for an exemption from the ABC test. The additional occupations include advisors, appraisers, content contributors, narrators or cartographers for certain publications, producers, registered professional foresters, and specialized performers hired to teach a class for no more than one week. AB2257 also provides exemptions for the entertainment industry, particularly the music industry.
Additionally, AB2257 removes the numerical content submission limitation on the exemption in AB5 for freelance cartoonists, editors, photographers, photojournalists, videographers, translators, and writers. Instead, businesses must refrain from displacing existing employees to use one of these types of contractors.