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Recently enacted AB 2257 (Chapter 38) amends the presumption under AB 5 that a worker is an employee under the ABC test pursuant to the holding in Dynamex (Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903) by establishing exemptions for several specific industry services such as photography, music, freelance writing, and translating services. Pursuant to the exemptions in AB 2257, covered workers in these categories may be classified as independent contractors under certain circumstances. (California Franchise Tax Board summary of AB 2257.)

As we previously reported, effective January 1, 2020, AB 5, enacted in 2019, codified the application of the ABC test under the California Supreme Court decision in Dynamex and expanded and clarified its application. The ABC test essentially replaced the previous common law test.

AB 5 significantly impacts most industries that customarily engage independent contractors, in particular the gig economy (e.g., rideshare and delivery drivers). (EY Tax Alert, 2019-1625, 9-13-2019; California Employment Development Department (EDD) website.)

Under the ABC test, unless the occupation is specifically exempted by law, hiring entities must treat all workers as employees unless they can demonstrate that all the following conditions are satisfied:

• The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
• The person performs work that is outside the usual course of the hiring entity's business.
• The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If all the conditions above are met, the hiring entity may generally treat most workers as independent contractors. Note, however, that the California Employment Development Department (EDD) continues to rely on the "Borello" test (California Supreme Court decision S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341) for certain occupations and as provided for under Labor Code section 2750.3.

See the EDD website (FAQs 4-7) for more information on when the Borello test is used.

Ernst & Young LLP insights

While AB 2257 creates new and modified exemptions from AB 5 for several worker categories, it does not affect many gig workers, such as those working as ride-share and delivery drivers.

California voters will get the chance under Proposition 22 to decide on November 3, 2020, whether app-based industry workers should be considered independent contractors.

See the California Secretary of State website for more information on the November statewide ballot measures.

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