Fixing the Business-to-Business Exemption in AB 5

Chris Micheli
Chris Micheli is a Principal with the Sacramento governmental relations firm of Aprea & Micheli, Inc.

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”]:

  • (A) 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. [does this require being “free” from all control? a hiring entity is likely to want to control the general quality, operational or safety standards used by contractors and should be permitted to do so].
  • (B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business [because this provision precludes most contractor relationships, it needs to be modified to eliminate this prohibition; an alternative change would be to create a threshold or to allow some amount of work to be performed that would benefit the hiring entity’s customers].
  • (C) The contract with the business service provider is in writing.
  • (D) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
  • (E) The business service provider maintains a business location that is separate from the business or work location of the contracting business [one possible change would be to allow a residence to qualify as a separate business location].
  • (F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
  • (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 [one possible change would be to eliminate the contracting requirement – would a contractor need to sign two agreements simultaneously in order to qualify under this subdivision? – and simply require good faith efforts by the contractor to have more than one agreement in place].
  • (H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services [one possible change would be to eliminate the advertising requirement – how much or what type is even mandated? – and simply require that the contractor not be restricted from contracting with other hiring entities].
  • (I) The business service provider provides its own tools, vehicles, and equipment to perform the services.
  • (J) The business service provider can negotiate its own rates.
  • (K) Consistent with the nature of the work, the business service provider can set its own hours and location of work [one possible change would be to allow the hiring entity to set a project completion date and require normal business hours to be worked by the contractor].
  • (L) The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

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.

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