assembly bill 5 – Bredemarket

California Assembly Bill 5—I mean 2257—and business-to-business exemptions

On Thursday, I attended an Orange County Freelancers Union meeting that focused on California Assembly Bill 5. The presentation was given by Lee Goldberg. I’ve talked about Assembly Bill 5 before, most notably regarding how Proposition 22 affected it, but I definitely learned something from Goldberg’s presentation.

Namely, that it’s technically incorrect to talk about Assembly Bill 5.

Whoops.

That bill was superseded by a subsequent bill, Assembly Bill 2257. It preserves the basic structure of AB5, but tweaks things in various ways. (And of course AB2257 was subsequently tweaked by Proposition 22.)

So henceforth when I’m referring to the bill text, I need to refer to the right bill. The text for AB2257 is here. This was incorporated into the California Labor Code as seen here.

From https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=LAB&division=3.&title=&part=&chapter=2.&article=1.5.

Goldberg briefly alluded to the business-to-business exemption discussed on AB2257. It has a number of points, and for my own education I subsequently took the time to read all the points, just to make sure that Bredemarket complies with the business-to-business exemption.

So let’s look at the business-to-business exemption in California Labor Code [2776]. Warning I am lot a lawyer bla bla bla.

2776.
Section 2775 and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship, as defined below, under the following conditions:
(a) If an individual acting as a sole proprietor, or a business entity formed as a partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business or to a public agency or quasi-public corporation (“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:

What follows are the 12 points that relate to the business-to-business exemption.

(1) 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.

So I started to look at each of these 12 points to see whether I thought my independent contracting business Bredemarket was compliant with them, starting with this first point. Those who are familiar with the ABC criteria have already seen a version of this. Perhaps the best way to summarize this is that a Bredemarket client can ask me to do work, but can’t tell me HOW to do the work. In fact, in some cases I tell the client how I am going to do the work.

(2) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. This subparagraph does not apply if the business service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.

This was another thing that impacted me from hearing Goldberg’s presentation. This was a little unclear in the ABC statement, but is clarified here.

For example, if Bredemarket contracts with a biometrics firm that sells gait recognition software to school districts, I can provide writing services to the firm (even if the firm employs other writers), but I (generally) can’t sell gait recognition software to school districts.

(3) The contract with the business service provider is in writing and specifies the payment amount, including any applicable rate of pay, for services to be performed, as well as the due date of payment for such services.

All of the Bredemarket contracts are in writing.

(4) 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.

Bredemarket has both the required city business license and the appropriate tax registration. (And a filed and published fictitious business name statement.) My city business license has some very specific stipulations, including one stating that my clients cannot come to the place where I work. Revelation: I do not work in the UPS Store that serves as my business address. I work in a room of my own home. As the City of Ontario knows, I work in a specific 25 square foot area in my own home. They have the map and everything.

(5) The business service provider maintains a business location, which may include the business service provider’s residence, that is separate from the business or work location of the contracting business.

See above. None of my clients is located either in my home or in the UPS Store. In fact, none of my clients is within 20 miles of my home or in the UPS Store. (I did try to solicit business from one company with a mailing address at that same location, but I haven’t won that client…yet.)

(6) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.

See “What I Do.”

(7) The business service provider can contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.

I contract with multiple businesses without restriction, and in fact once had to refuse business from a potential client because the client’s contract had a non-compete clause which would have effectively put Bredemarket out of business. As anyone with an MBA knows, going out of business is usually not a good thing…although Transformco seems to have a sunny attitude about the continuing demise of Sears and Kmart.

(8) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.

Um…yeah. Website, LinkedIn, Facebook, Google, Anchor, and other places.

(9) Consistent with the nature of the work, the business service provider provides its own tools, vehicles, and equipment to perform the services, not including any proprietary materials that may be necessary to perform the services under the contract.

Done.

In fact, when I started out, another independent contractor insisted to me that I should NOT provide my own tools, and that my clients should provide them. Needless to say, this other independent contractor does not live in California, because that would result in a clear ABC violation.

(10) The business service provider can negotiate its own rates.

Subject to the free market, yes. (Still waiting for that $10,000 per hour client.)

(11) Consistent with the nature of the work, the business service provider can set its own hours and location of work.

Definitely true, since much of my independent contracting work is…independent. If a client has requested a weekly meeting every Thursday morning on a project, I could choose to do all of my work Wednesday night if I so desired. (I don’t.) And I have worked in a variety of locations, including the parking lot of a business in California, and a spare bedroom in Alabama. I’ve known others who travel around and contract in Central America or wherever, but I haven’t done that. Yet.

(12) The business service provider is not performing the type of work for which a license from the Contractors’ State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

My marketing and writing services do not require a license.

So after listening to Lee Goldberg’s presentation and perform some post-presentation research, I feel more confident that Bredemarket isn’t in danger of running afoul of employee classifications.

Hopefully I’m not being overconfident.

When a business should use a (non-driving) independent contractor

In my previous post, I talked about the recently-passed California Proposition 22, how it relates to Assembly Bill 5, and the three criteria that Assembly Bill 5 uses to determine whether a worker is an employee or an independent contractor. As a reminder, those three criteria are as follows:

(A) 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.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

So when does it make sense for a company to contract with an independent contractor, rather than hire an employee?

The most obvious reason for a company to use an independent contractor is when the contractor provides services that are outside what the company usually does.

I could provide a whole list of examples of what those “services” could look like, but let me focus on a single example.

Wendy’s Widget Company has been manufacturing round green widgets since 1969, from a factory in Columbus, Ohio. (For various reasons, foreign or overseas round green widget manufacture was not desirable.)

One day, someone in a quality circle (Wendy’s Widget Company was old school) suggested that the company introduce square blue widgets. Square blue widgets had been around for a while, but Wendy’s Widget Company had never produced them.

The company decided to produce a small run of square blue widgets, and then get someone to market them.

But the company’s existing marketers were all accustomed to round and green things, and were incapable of marketing the square blue ones. (Not that they didn’t try, but the marketers did not understand the concept of 90 degree angles, so the effort was doomed to failure.)

The company could have hired an square blue widget expert, but what would have happened if the small run experiment was a failure, and the expert would have been terminated in a few weeks?

So the company hired an independent contractor to complete a well-defined project. This project required the contractor to develop marketing materials for a possible Wendy’s Widget Company square blue widget. The contractor would go off and work on the assignment, checking in with Wendy’s Widget Company at well defined checkpoints.

But when the company lawyer found out that the contractor was based in California, the lawyer asked, “Does this meet California AB5 criteria?”

Let’s see.

In this case, the contractor was NOT under the direct control of Wendy’s Widget Company. The contractor was not told to work from 8:00 am to 5:00 am Ohio time, was not assigned a Wendy’s Widget Company computer, and did not get matching contributions to the company’s 401(k) plan.
And, in this case the contractor was performing work outside the usual course of business for Wendy’s Widget Company. The contractor not only had in-depth knowledge of 90 degree angles, but also had a deep appreciation of the music of both Bobby Vinton AND Eiffel 65.
Finally, in this case the contractor regularly worked with a variety of companies to provide marketing materials for widgets of all shapes and colors.

The lawyer was satisfied, the contract was completed, and the contractor went on to help another company with its red octagon widgets. Everyone was happy.

OK, that whole example was made up. (But now I’m hungry for a hamburger.)

But there are times when a company wants to pursue something outside of its comfort zone, but doesn’t want to dedicate an employee to do it.

If your company has such a need, and if my experience (in biometrics, identity, and other areas) suggests that Bredemarket can help your company meet your goals, contact me.

California Proposition 22 and non-driving independent contractors

In case you haven’t heard, Tuesday was an election day in the state of California, and throughout the rest of the United States. There were a number of candidates and propositions on ballots throughout the country, but for this post I’m going to concentrate on a single California proposition, Proposition 22.

By Alexander Torrenegra from Secaucus, NJ (New York Metro), United States – On my first @Uber ride in Bogota heading to a Startup Weekend. Priceless easiness and safety. I love disruptive innovation., CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=37982760

In ballot legalese, this proposition’s title was “EXEMPTS APP-BASED TRANSPORTATION AND DELIVERY COMPANIES FROM PROVIDING EMPLOYEE BENEFITS TO CERTAIN DRIVERS. INITIATIVE STATUTE.” What that means is that if the proposition passes, drivers for “app-based transportation and delivery companies” (think Uber, Lyft, DoorDash, etc.) will be exempted from the provisions of California’s Assembly Bill 5, and therefore will NOT be classified as employees.

And for the record, it looks like Proposition 22 has passed.

However, Assembly Bill 5 still applies to people who are NOT drivers for app-based transportation and delivery companies. Specifically, Assembly Bill 5 provides the following test to see whether a person is an employee or an independent contractor.

Section 2750.3 is added to the Labor Code, to read:
(a) (1) For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
(A) 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.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

When AB5 was passed, a lot of attention was focused on the need for companies to properly classify their workers as employees, when warranted.

But not a lot of attention was focused on the times when companies would PREFER to use independent contractors instead of hiring employees.

I’ll talk about that in a future post.