AB 5: THE BONA FIDE BUSINESS-TO-BUSINESS RULE
Ivan Hoffman, B.A., J.D.
Editorial Note: In an effort to remedy the defects in AB 5, the California legislature recently passed and the Governor signed a new bill, AB 2257. (read that article) The new statute replaces Labor Code section 2750.3, and amends or adds other statutes.
However, the reader should read all the AB 5 articles on my site before reading the article about AB 2257 since my article refers to those prior provisions contained in AB5. Keep in mind though, that AB 2257 controls.
I would urge the reader to read the AB 5: An Overview article on my site before reading this article.
AB 5 further provides as follows:
(e) Subdivision (a) and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions:
(1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello, if the contracting business demonstrates that all of the following criteria are satisfied:
The above section requires a “bona fide business-to-business contracting relationship,” meaning that the transaction must be genuine and not set up solely to avoid the operation of Dynamex or the statute or Borello. Thus if one entity (the “business service provider,” meaning the entity providing the services of the “worker,” enters into an agreement (see more below) with another entity (the “contracting business,” meaning the entity engaging the services of the business service provider), then assuming all the elements below are satisfied, the determination of whether the business service provider is an employee or an independent contractor is determined under the Borello rules and not the Dynamex rules. Here again, the engaging party, the contracting business, bears the burden of proof as to all these elements. (see more below)
(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.
(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.
(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.
(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.
(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
(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.
(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.
So that is the first hurdle that must be overcome. But even assuming the contracting business can prove that all of the above factors are satisfied, then the standards established in Borello must also be determined. Among the Borello factors which are to be balanced and weighed are:
The key factor (the so-called “economic realities test”) is whether the engaging party has the right to control the working party both as to the work done and the manner and means in which the work is done. In an independent contractor relationship, the engaging party does not have this control but may only control the results of that work. The Borello Court stated, at page 350 in part:
Following common law tradition, California decisions applying such statutes uniformly declare that “[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. ...”
The Court went on to list additional factors that are to be considered at pages 350 and 351 and stated:
These include (a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.
The Court stated at 351: “(g) whether or not the work is a part of the regular business of the principal;” and at 355: “and (5) whether the service rendered is an integral part of the alleged employer’s business.”
The Court also added at 350:
Thus, we have noted that "[s]trong evidence in support of an employment relationship is the right to discharge at will, without cause.
The reader should carefully note that factor (g) and the “discharge at will” factor (nor the factor below) are NOT part of the elements that the contracting business is required to prove under the statute as discussed above. .
The Department of Industrial Relations at https://www.dir.ca.gov/dlse/FAQ_IndependentContractor.htm offers an additional Borello factor:
The alleged employee’s opportunity for profit or loss depending on his or her managerial skill.
And then adds:
Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288)
Key question: Thus, the reader will recognize the same issues discussed above in the Dynamex context here as well and therefore, when the statute says the determination will be made under Borello, what does it mean? Does the statute only require proof of those items the statute enumerates or does it require proof of all the other Borello issues? Probable answer: It would appear that satisfying both the statutory as well as the Borello factors is required.
As under Dynamex, you can see the difficulty here, especially as to (2) in the above paragraph and number (g) in the Borello factors. If this is so, then if a book publisher ("contracting party") seeks to engage an editor or a graphic artist which operates through an entity ("business service provider"), it seems likely that the services of those parties would be deemed to be “part of the regular business” of the publisher and thus those parties would likely be deemed to be employees.
The statute goes on:
(2) This subdivision does not apply to an individual worker, as opposed to a business entity, who performs labor or services for a contracting business.
(3) 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 paragraph (1) of subdivision (a).
The above two provisions mean that the determination of employee or independent contractor as far as the business service provider does not apply to that determination as to the individual working for the business service provider and that latter party’s status is determined under Dynamex (or presumably, under the Borello standards if the party is one of “professional services,” although this presumption is not at all clear). However, in discussing the Borello standards applicable to “professional services,” the statute also states:
(A) An “individual” includes an individual providing services through a sole proprietorship or other business entity.
Thus the confusion is if you are an individual operating through an entity, whether the above section or the business to business section is used to determine your status.
(4) This subdivision does not alter or supersede any existing rights under Section 2810.3.
This section deals with businesses which supply laborers and I will omit any discussion of this because it would unduly complicate this discussion.
As with “AB 5: An Overview,” my focus in these articles is on intellectual property creators and those who seek to engage them. Clearly the statute covers many, many other workers and hiring parties but those are beyond the scope of these articles.
There are other provisions of the law which are likely to be applicable to your given situation. This is a very complex statute that will likely be the subject of much judicial interpretation over the coming years. Given this complexity and given the enormous legal and financial consequences for “guessing wrong,” this is not something you should try to figure out on your own. These are individual situations and there is no one size fits all answer.
Also read the other articles on my site dealing with AB 5.
Copyright © 2019 Ivan Hoffman. All Rights Reserved.
This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. You should not rely on this article in any manner whatsoever and you should not draw any conclusions of any sort from this article. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article is based on United States laws but the laws of other countries may be different. You should consult with an attorney familiar with the issues and the laws of your country. This article does not create any attorney client relationship and is not a solicitation.
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