The new law governing independent contracting, AB 5, includes what can be described as a business-to-business (B2B) exemption. But a close examination of the actual language shows that the B2B exemption is virtually inoperable.
The author of AB 5 consistently states that the B2B carve-out provides relief to freelancers and sole proprietors to continue operating in the state and not be subject to AB 5’s ABC test.
However, even if a service provider can establish that it meets all of the factors, misclassification liability on the hiring entity is so great that no one wants to take the risk (misclassification liability may include unpaid minimum wage, overtime, meal and rest breaks; unpaid federal, state and local income tax; Private Attorneys General Act penalties; unpaid sick time; unpaid work-related expenses; workers’ compensation premiums; and unemployment compensation, just to name a few).
Impediments to Exemption
To qualify for the B2B exemption, the contracting business must show that it meets all of the 12 requirements of this exemption. Thus, failing to meet just one of the 12 factors means the business entity does not qualify for the exemption.
Businesses must keep in mind that, even if the B2B exemption does apply, businesses still need to satisfy the Borello test, which is a demanding standard in and of itself.
While many of the factors are problematic, the following 4 factors make it nearly impossible for businesses to benefit from this ABC test exemption:
(B). The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.
(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.
(K). Consistent with the nature of the work, the business service provider can set its own hours and location of work.
Providing Services to Customers
Factor (B) creates significant impediments for businesses in a B2B relationship. Many service providers are hired for the specific purpose of providing services directly to the hiring entity’s clients, customers or patients. That is the entire purpose of being able to contract out work.
For example, a hospital may keep a Spanish translator on staff full-time, but not a Dutch translator because the need for such a service is rare. However, when needed, the Dutch translator is providing translation services to the patients of the hospital, not to the hospital itself.
Factor (G) is problematic because, while a service provider should be free to contract with other entities, the requirement is that it “actually contracts” with other entities.
What exactly does this mean? Does there need to be multiple contracts through the duration of the contractual relationship for the B2B exemption to apply? What happens if at the time of forming the contractual relationship, the service provider has 5 other contracts, but it eventually stops renewing the other contracts; does the B2B exemption still apply? Does the hiring entity have to sever the relationship when the service provider stops contracting with others? If so, what breach of contract concerns will arise?
(H) presents similar concerns. “Advertise” is not defined in AB 5, creating uncertainty. Does “advertise” mean that the service provider simply needs to tell people that it provides these services? What about social media postings; do those count? Or, does it need to place ads in the local paper? Also, what happens if the service provider advertises only one time; does that count for the duration of the contractual relationship?
The burden should not fall on the hiring entity to keep checking in to see if the service provider is still advertising. Again, if it is not, is the hiring entity expected to sever the relationship and be liable for breach of contract?
Setting Own Hours/Location
Finally, (K) creates a number of concerns because the service provider will not always be able to set its own hours or location of work. Again, using the translator as an example, the translator will need to work while the patient is in the hospital and will need to provide services at the hospital itself, not at a location of the translator’s choosing.
Clearly, the current B2B exemption language is not workable and needs significant cleanup to allow entrepreneurs in this state to continue providing services. Failing to further amend AB 5 to broaden the B2B exemption has the potential to eliminate the vast majority of independent contractors in California.
The Legislature should amend the law further to provide a holistic approach to the application of the ABC test that reflects today’s modern workforce.
Story adapted from the Capitol Insider blog post.