California’s “Business-to-Business” Exception To Strict Independent Contractor Definition

Effective January 1, 2020, a portion of Assembly Bill (AB) 5 — new Labor Code section 2750.3(e) — exempts bona fide business-to-business contracting relationships from the ultra-strict Dynamex “ABC” test for independent contractor classification.  The previously prevailing “Borello” multi-factor balancing test for the contractor vs. employee classification will continue to apply to this exemption.  See, California’s Independent Contractors (October, 2019).

A business entity that provides services (the “service provider”) to another business entity (the “hiring entity”) can fall within the business-to-business exception if:

  • Both businesses are either a sole proprietorship, corporation, partnership, limited liability company or limited liability partnership; and
  • The parties enter into a written contract.

Additionally, the service provider must:

  • Be able to negotiate its own rates and be free from the contracting business’s control and direction both under contract and in fact;
  • Provide services directly to the hiring entity rather than to the latter’s customers;
  • Obtain any required business license and/or business tax registration;
  • Customarily engage in an independent established business of the same nature as the work performed;
  • Advertise and hold itself out to the public as available to provide the same or similar services and actually contract with other businesses to provide such services without restrictions from the hiring entity;
  • Provide its own tools, vehicles, and equipment and set its own hours and location of work; and
  • Refrain from performing construction-type work that requires a license from the Contractor State Licensing Board.

For example, if interior design company Lovely Decors, Inc. (LDI) hires Modern Window Treatments, LLC (MWT) to install custom blinds at LDI’s corporate office and all of the above criteria are met, then the determination of employee or contractor status shall be governed by Borello. If, however, LDI hires MWT to install custom blinds for LDI’s customers, then this business-to-business exception to the rigid “Dynamex ABC” standard might not apply.

See also:

For further information, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.

Cindy Bamforth

October 24, 2019

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