September 14, 2020 Here we go again. California’s new independent contractor law, Assembly Bill 5 (also called “AB5” for short) went into effect on January 1, 2020. It caused a national uproar. Critics called AB5 arbitrary, short-sighted, politically motivated, antiquated, costly, and nonsensical. Proponents said that it protected workers who otherwise could not protect themselves (for example, independent contractors cannot avail themselves of worker’s compensation and unemployment compensation benefits); put employers on notice that they could not gain an economic advantage over their competitors by misclassifying workers (hence, by misclassifying, employers incur lower costs); simplified the process of analyzing whether a worker was a bona fide independent contractor; and resolved various issues with the then-current misclassification test otherwise known as the “Borello Test,” which has been described by courts and legislators in California as a complex and manipulable multifactor test which invited employers to structure their relationships with employees in whatever manner that best evaded liability.
Regardless which points and arguments you find more persuasive or truthful, it is without dispute that under AB5 it was nearly impossible for an enterprise or mid-sized company to classify an independent worker performing higher-end IT work as a bona fide independent contractor to fill openings – on a temporary basis – or for short term projects or assignments (up to 12 or 18 months). AB5 also left many key terms undefined, and essentially no guidance on how to interpret major provisions. In my former professional life as a practicing attorney, I cannot count the number of times I told clients and colleagues that whatever decision they made other than classifying a worker who wanted to be independent as an employee came with significant risk (Note: AB5 presumes all workers are employees).
Enter Assembly Bill 2257 (“AB 2257”). It was signed into law on September 4, 2020, a mere 247 days after AB5 went into effect. AB 2257 repealed and replaced AB5, meaning that AB5 is supposed to be forever gone, invalid, and ineffective. So, some questions immediately arose: does AB 2257 ‘fix’ AB5? Is it drafted more clearly? How is it different? Does AB 2257 help or hurt businesses and workers in the contingent labor industry more than AB5?
How AB 2257 Affects High-End Independent Contractors
Before I continue, please bear in mind that my interest is in assessing the practical impact of AB 2257 on higher-end IT work in the contingent labor industry, including on service providers (e.g., staffing companies, agent of record service providers, solutions providers) and their customers, and the skilled workers that want to own their own 1 person company and be engaged by these service providers as independent contractors.
For starters, AB 2257 utilizes much of the exact same text as its predecessor, AB5, and retains the foundational principle that all workers are presumed to be employees. Further, the so-called “ABC” test continues to apply to determine whether a worker is an employee or independent contractor, and a limited number of exceptions to the ABC test are permitted provided that a long list of criteria is satisfied for each applicable exception.
After reading AB 2257, I can tell you that it is just as unhelpful for enterprise and mid-sized clients seeking to engage higher-end IT professionals as independent contractors through a service provider (e.g., staffing company) as AB5. My view is intentionally limited to these types of clients and workers because the staffing (and agent of record and solutions) world is dominated by IT professionals. (side note: AB 2257 provides additional clarity for freelance writers and photographers, entertainers, and others, but not IT).
Let’s start with one very important example that drives my negative view of AB 2257 in the context of this article.
AB 2257 Example
AB 2257, and AB5 before it, only applies to the “hiring entity”. According to AB 2257: “Under the ABC test, a person providing labor or services for remuneration is considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation, or business.” In other words, the analysis of whether AB 2257 applies is supposed to be limited to the “hiring entity” (meaning, at least ostensibly, not to other entities in the chain, such as an IT staffing company’s client, that do not qualify as the “hiring entity”).
Does that mean that a company can hire a service provider intermediary, such as a staffing company or a company that provides agent of record/compliance services for independent contractors, to avoid application of AB 2257? The answer: I do not know. Why? Because AB 2257 does not define a “hiring entity” and, to the best of my knowledge, I have not seen any case law that definitively addresses the matter. I also looked through California law, and it is impossible to discern what a “hiring entity” may mean in the context of AB 2257 with any reasonable degree of certainty. Is it merely the entity that pays the independent contractor? Is it the entity that enters into the contract with the contractor? Is it the entity that receives the services of the contractor? And, notwithstanding what you think may be the answers to these questions, are you confident that a judge, sitting in California, will even care and will, instead, find a way to extend the concept of a “hiring entity” to fit the facts of that case? Or, will a judge merely apply a joint employment analysis to the relationship between the independent contractor and the service provider’s (e.g., staffing company’s) client instead? If not, will a judge find a definition of “hiring entity” from another state and apply it, in whole or in part? If yes, which state? Are you willing to roll the dice and take any of these chances?
It is difficult to understand how and why AB 2557 (and AB5 before it) completely ignores the contingent labor industry in AB 2257, which I presume is a multi-billion dollar service in that state alone. And, without giving away any client confidences from my prior professional life, I can tell you that many legislators in California were lobbied by folks in the contingent labor industry prior to the passage of AB5 and AB 2557.
Other Unhelpful AB 2257 Provisions
Further to my point. When I originally read AB 2557, I thought the industry would be given a lifeline under the so-called business-to-business exception (meaning, if an independent contractor and the hiring entity meet the requirements of that exception, then AB 2257 does not apply and instead the Borello test applies; the Borello Test is an easier test to meet than AB 2257). However, I was disappointed once again. It appears that AB 2257 loosened up the exception a little, including allowing work to be performed for the benefit of the contracting business or its customers (under AB5, the exception could be met if the work was performed by the independent contractor directly for the contracting business, and did not include work done for the contracting businesses’ customers). However, to meet the exception as applied to customers of the contracting entity (e.g., to the customers of a staffing company or an agent of record service provider, for example), the work has to be done by an employee of the independent contractor, i.e., the independent contractor has to hire someone or otherwise make him/her-self an employee of his/her own company.
You see, in my view, what California is really telling you in the business-to-business exception is that if the independent contractor pays extra taxes for a W2 employee then they will let that contractor – that contractor being a sole owner, single member LLC, for example – be exempt from AB 2557. The real focus apparently is not on the nature of the work itself or the bona fides of running an independent business as the sole, working owner. And trust me, I fully understand the canned argument that making someone a W2 provides them work protections not otherwise available to independent contractors (e.g., anti-discrimination protection under Title VII), but that fully misses the point of this article because that argument is true in every case and it henceforth obliterates any real, bona fide desire to become a higher-end, independent IT contractor and assume the risks associated therewith.
The slightly revised scheme of the business-to-business exception in AB 2557 ignores the real and growing number of people who do not want to work for anyone else, want to be in business for themselves, are highly skilled IT professionals, want to charge a premium for their service, like working for multiple companies over time, and want the flexibility and extra earning power of not being a W2 employee. And these professionals understand the risk. I know because I have been working with professionals like these for 20 years. And, it is very important that you understand this situation is completely and wholly different than the desire to protect lower paid, lower skilled workers in the gig economy who objectively have less bargaining power on an individual basis. I am not commenting or arguing one way or the other with regard to the gig economy; I can save that for another day. Yet, despite what is actually happening in the world of IT work in California (and throughout all the industrialized world), AB 2557 completely ignores it or, stated differently, makes it nearly impossible for that IT professional to give it a go on his/her own in a competitive landscape all the while understanding and consciously taking the risk of doing so.
And, I must say, AB 2557 retains the largely arbitrary exception criteria for “professional services.” What do I mean? It’s best to show you another example so I can make my point. For example, California legislators concluded that a newspaper cartoonist provides a professional service – thus becoming eligible for the exception assuming other criteria are met – yet IT professional services – which often include high end freelance workers that work on highly complex matters such as large scale, one-time cloud migrations or deployments of new hardware – do not meet the definition of a “professional service” provider?
All in all, AB 2257 is highly disappointing because it shows that despite the uproar – and notwithstanding that everyone keeps forgetting that AB5 was supposed to counteract the so-called evils of the gig economy but in the process of doing so it sweeps up a gigantic portion of the working economy of the entire state of California, which on its own is the 8th largest economy in the world – the legislators in California still have no solution to the changing realities of the modern workforce. I mean, really, what is their solution other than enacting law that presumes everyone is an employee, which is definitely not in line with what collectively hundreds of thousands, if not millions, of workers and businesses want? As of now, the binary classification decision of employee or independent contractor remains.
For all of the reasons discussed above, at least insofar as higher-end IT professionals in the contingent labor world are concerned, one can only hope that more states do not follow or continue to follow California’s lead.
And in other news, I will be issuing an open letter to California, members of the U.S. Congress, and anyone else in a position of political power encouraging, and in fact begging them, to enact a third classification of worker in this country. Can we please provide clarity to businesses and workers alike that comports to modern reality? And if that happens, then we will need the states to follow suit. At least for now, I will not be holding my breath waiting for the type of change I know we all need.
Legal Disclaimer – This article is for informational purposes only and not for the purpose of providing legal advice.
Written by: Mark Zisholtz, Esq., M.S.M., SVP of Compliance at ICON, and a recognized national speaker on topics involving independent contractor compliance, engagement, and management, and other employment and labor matters. Any mistakes in this blog post are completely owned by Mark, and any good points are shared with the entire ICON team for the benefit of the contingent labor industry. If you have any questions or would like to discuss this topic further, Mark can be contacted at [email protected].
If there is a will, there is a way. ICON has its fingers on the pulse of compliance in California, across the United States, and in Canada. If there is a way to engage contractors as bona fide independent contractors in California and elsewhere, we can get the job done in a low risk environment. For more information about ICON’s services, click here or contact Patrick Aubry at [email protected] or 720.394.6542.