The first Uber ride happened in San Francisco on July 5, 2010. Over the next decade, ridesharing would become a pillar of the new gig economy. As people put in full-time hours as gig workers, a question of the appropriate employment status for contract work arose.
AB5 law sought to rectify a contract labor loophole as businesses curbed the financial obligations for workers, yet imposed traditional employee responsibilities on workers. AB5 exemptions were made to insulate specific trades and B2B contracting.
AB5 business to business exemptions do exist, but because it is defined so narrowly, businesses need to understand how it works before entering into any such agreements. Read on for clarity about AB5 business to business exemption issues.
What is AB5?
So what is AB5 Law? Known as the “gig worker law, ” AB5 Law took effect in California on January 1, 2020, and mandated that workers formerly identified as contractors should be given employee status and benefits. In September of that same year, the Assembly passed supplemental legislation (Bill 2257) to establish the California AB5 exemptions list.
When Uber and Lyft would not comply with AB5, the Attorney General filed an enforcement motion with the California Superior Court. Judge Ethan Schulman stated that “To state the obvious, drivers are central, not tangential, to Uber and Lyft’s entire ride-hailing business.” He ruled that Uber and Lyft must have contract drivers properly classified as employees and thus given the associated benefits: workers comp, unemployment, paid sick and family leave, health insurance, etc.
This issue would be eventually brought before the people of California to vote on. Proposition 22 had heavy support from Uber and Lyft. 58% of California voters were in favor of it for the November 2020 general election. The power of democracy allowed Uber and Lyft app-based drivers to once again be independent contractors rather than employees, but with some benefits like healthcare subsidies, accident and accidental death insurance.
AB5 Business to Business Exemption is…
The AB5 Business to business exemption allows business service providers who are established as “a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation,” to enter a contractual arrangement with a business.
The B2B exemption for AB5 laws triggered an influx of applications to set up limited liability companies (LLCs) or other qualifying forms of B2B. But keep in mind that the B2B exception is the narrowest one.
Below is the criteria for the AB5 business to business exemption provision:
- The provider is, in fact, independent and not under the control and direction of the partnering business or subject to performance requirements.
- The provider is doing the service for the business and not the customers of the business.
- A contract has been made in writing.
- The business services provider is properly licensed according to the requirements of their local laws.
- Providers maintain a separate physical location from the contracting business.
- The provider is customarily engaged in an independently established business of the same nature as the work being performed. They also maintain the capacity to contract with other businesses and provide the same or similar services (so they are free to take on other clients).
- The provider publicly markets themselves as being available to provide services to other businesses for related services.
- The provider furnishes and utilizes their own tools, vehicles, or equipment.
- The provider has the leverage to negotiate rates, set their own hours, and determine their own work location.
- The work being performed is not subject to Contractors State License Board requirements (under Chapter 9).
For businesses that don’t qualify for the AB5 business to business exemption or other provisions, Contractor Management Services is a solution. With our staffing solutions, Aida provides the workers you need without having onboard them as traditional employees. Because our talent is employed by us, we cover employment benefits requirements while our workers provide the needed labor for you.
Who is Exempt from AB5?
Uber and Lyft eventually won the battle to have their app-based drivers restored to contractor status. But there are other occupations that fell under the AB5 Exemptions list:
- Private investigators
- Insurance & real estate agents
- Direct sales agents
- Travel agents
- Human resource administrators
- Marketing professionals
- Grant writers
- Fine artists
Assembly Bill 2257 (AB2257) would later expand the list of exemptions by including independent contractors who provide specialized services, such as document translation, digital content collateral, or feedback aggregation. However, some conditions were put in place to prevent loopholes.
Exemptions to AB5 with Conditions
- Commercial fishermen – exempt from all requirements, but must be covered with unemployment insurance
- Manicurists, estheticians & barbers – exempt but they must have the freedom to set their own rates and be paid directly by clients and take their own appointments.
- Photographers, photojournalists, graphic designers, writers, editors, or illustrators – May not exceed 35 submissions for each hiring entity, each year.
AB5 Business to Business Exemption is not…
While a business entity may assume they qualify for the Business-to-Business (B2B)’ exemption, this does not necessarily mean that you can enter into an independent contractor/LLC relationship without risk. In other words, the exemption does not guarantee that you are compliant when treating subcontractors as independent contractors.
For your protection, you ought to secure proof that the business services provider is a legitimate business entity and has secured its own business location (a separate address can be provided for documentation purposes). Additionally, they should have the necessary business licenses according to the nature of the work and their local laws.
Also, you will need to have a written contract that establishes that the relationship between the entities is AB5 business to business exemption compliant. It’s helpful to consult a professional HR service or legal services to have all the paperwork in order for a B2B contracting arrangement.
What is the ABC Test?
The ruling of the California Supreme Court on the Dynamex Operations West, Inc. vs. The Superior Court of Los Angeles is why California has the AB5 labor law. The court prescribed that businesses apply a three-prong test (known as the ABC test) to distinguish employees from independent contractors. This test is meant to override and simplify the Borello test (more on this later).
If the worker does not meet all of the criteria, they are to be considered employees and provided with employee benefits such as workers comp, unemployment, paid sick and family leave, health insurance, etc.
- A: The worker is free from the control and direction of the hiring entity in connection with the work’s performance, both under the contract for the performance of the work and in fact.
- B: The worker performs work that is outside the usual course of the hiring entity’s business.
- C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The Borello Test
What makes a worker an employee? In 1985, the case of S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (Borello) was brought before the California Supreme court to answer this question.
The Borello Test evaluates the business to worker relationship and was also dubbed the “right to control” test. The principal concern is an employer’s control over how the work is done. Also considered is the skill required for the job, how the work is paid for, whatever investments a worker is to make, and the expected duration of the working arrangement.
The following questions outline the Borello test criteria:
- Does the worker have the sole authority over the manner and means of accomplishing the objectives of the work?
- Is there a requirement for the worker to be given notice by the hiring entity when being terminated without cause?
- Is the worker assuming an occupation or operating a business that is distinct from what the hiring business provides?
- Is the worker performing their duties without the direct supervision from the employer?
- Is skill a requirement for the occupation in question?
- Will the worker be providing their own equipment and supplies to do the tasks?
- Does the worker have hiring and firing authority over other workers?
- Is the worker entering into a temporary or indefinite working arrangement?
- Is how the worker is paid based on finishing the job?
- Are the services performed by the worker separate from the regular business of the employer (working directly for the business and not for the customers of the business)?
- Would both the worker and the hiring entity believe that independent contracting the nature of the relationship?
The above 11-step questionnaire is rich in theory, but the ABC test is a condensed way to characterize in advance if a worker is an independent contractor or an employee. Are you AB5 compliant? Take the quiz.
Final Thoughts on AB5 Business to Business Exemptions
While the provision made by AB5 Business To Business Exemption could allow the kind of temporary work arrangement you want for your business, you’ll need to carefully consider California labor laws compliance guidelines.
We understand that labor laws like California’s AB5 make it particularly challenging for businesses to get the workers they need in light of their bottom line. Our on-demand platform allows you to bring in the workers you need and track performance metrics.
If you’re facing a complex staffing issue, contact Aida for guidance. Our team of staffing solution experts can discuss how our platform can provide you with temporary staffing solutions.