Business-to-Business Contracts Under AB 5/ AB 2257
The update to employment law triggered by AB 5, and subsequently AB 2257, not only affected employees and independent contractors, but also certain contracting relationships.
In order to qualify for the business-to-business (B2B) exemption under AB 5/AB 2257, a business that is hired to provide services to a contracting business (the one doing the hiring) needs to meet the statutory requirements under Labor Code Section 2776 and the Borello Test. If both sets of criteria are met, then that service provider can be classified as a true B2B relationship, which is not subject to the ABC Test.
AB 2257 Exemption
Labor Code Section 2776(a)[i] has twelve criteria that must be met in order for the exemption from the ABC Test to apply. The contracting business must demonstrate that the contract for services 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 service, and that 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.
is providing services directly to the contracting business rather than to customers of the contracting business.
has a required business license or business tax registration, if required in their jurisdiction.
maintains a business location that is separate from the business or work location of the contracting business.
is customarily engaged in an independently established business of the same nature as that involved in the work performed.
can contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.
advertises and holds itself out to the public as available to provide the same or similar services.
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.
can negotiate its own rates.
can set its own hours and location of work.
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.
If the contracting business can demonstrate that the business service provider meets all of these requirements, then that business service provider meets the exemption’s criteria and the relationship can then be analyzed under Borello.[ii]
After meeting the above criteria, the contracting business can analyze the working relationship under the following factors. The Borello Test is a ‘totality of the circumstances’ test where each factor is analyzed to determine whether it weighs more in favor of an employment relationship or more in favor of an independent contractor relationship. The dividing line between these two types of relationships is control: the more control a worker/service provider has, the more the factors lean towards independent contractor, and the more control a contracting business has over the worker/service provider, the more the factors lean towards an employment relationship.
A contracting business must take into consideration:
Whether the potential employer has all necessary control over the manner and means of accomplishing the result desired, although such control need not be direct, actually exercised or detailed;
Whether the worker performing services holds themselves out as being engaged in an occupation or business distinct from that of the employer;
The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision;
Whether the service provided requires a special skill;
Whether the employer or the worker supplies the instrumentalities, tools, and the place for the worker doing the work;
The length of time for which the services are to be performed;
The method of payment, whether by time or by the job;
Whether the worker has invested in the business, such as in the equipment or materials required by their task;
Whether or not the work is a part of the regular business of the hiring entity;
The worker’s financial investment in the equipment or materials required to perform the work;
Whether or not the worker and the potential employer believe they are creating an employer-employee relationship (this may be relevant, but the legal determination of employment status is not based on whether the parties believe they have an employer-employee relationship);
Whether the employer has a right to fire at will or whether a termination gives rise to an action for breach of contract;
The degree of permanence of the working relationship;
Whether the worker hires their own employees; and
The worker’s opportunity for profit or loss depending on his or her own managerial skill.
The analysis of these factors is fact/situation specific: not all business service providers analyzed will have the same result, even if they are in the same line of work. While many of Labor Code 2776(a)’s criteria and the Borello factors overlap, AB 2257 has added more administrative work on the part of the contracting business to ensure that the working relationship is properly classified. As such, any analysis conducted under the exemption and the Borello Test should be memorialized and kept with other important business records.