Last year’s AB 5 (Gonzalez) codified and expanded the reach of the California Supreme Court’s Dynamex decision. One of the categories of exemptions to the ABC Test set forth in AB 5 is for bona fide business-to-business contracting relationships. As can be seen below in the law’s actual language, this exemption is actually quite difficult to comply with for many businesses and AB 5 should be amended to provide greater flexibility so that existing business relationships are not adversely impacted.

In order for the business-to-business exemption to apply pursuant to AB 5, these relationships must meet the following conditions in order to not be subject to the holding in Dynamex (and instead be subject to the Borello factors for properly classifying workers):

According to AB 5, if a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation contracts to provide services to another such business, the determination of employee or independent contractor status of the business services provider shall be governed by the Borello factors.

However, this will only be the case if the “contracting business” demonstrates that all of the following 12 criteria are satisfied, which are found in Labor Code Section 2750.3(e)(1)(A)-(L) [one possible change is to eliminate the word “all” and substitute “majority”]:

Second, AB 5 provides that the business-to-business exemption does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a contracting business. Instead, the determination of whether an individual working for a business service provider is an employee or independent contractor of the business service provider is governed by Section 2750.3(a)(1) [this provision bans individuals from being business contractors, which is unwarranted; one possible change is to exempt workers who file a Schedule C with their federal income tax return].

There is a myriad of factors, each of which must be met, in order for the business-to-business exemption to apply and for an independent contractor relationship to not be subject to the strict ABC Test pursuant to AB 5. These twelve factors must be modified so that more businesses can utilize this exemption and have greater certainty in doing so.