California deems nearly all kinds of workers employees. There are, however, some important circumstances where workers may be classified as contractors. In my first post of this series, “Classifying California Cannabis Workers,” I explained the basics of employee versus independent contractor classification. Today, I look at some of the key independent contractor exceptions for California cannabis businesses.
Quick refresher on California cannabis worker classification
A few years ago, the state passed Assembly Bill 5, codifying the so-called ABC Test from a 2018 case, Dynamex Operations West, Inc. v. Superior Court. The ABC Test puts the onus on employers to prove that workers are contractors by meeting all three of the following elements:
(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.
As I mentioned in my last post, though the test is short, it can still be difficult for employers to meet. So the legislature crafted a few exceptions to the ABC Test. I explain two of them below, each of which can be important for cannabis businesses.
Business-to-business independent contractor exceptions
Sometimes cannabis businesses think they can get around classification if they contract with an entity as opposed to a person. But that’s not always the case! California has a B2B independent contractor exception, but it’s an uphill battle to meet. If a cannabis company contracts with a business (partnership, LLC, corporation, etc.), then in order for the B2B exception to apply, (1) the company must prove that all TWELVE (!) of the below criteria are met, and then (2) apply the Borello Test factors that I discuss at the bottom of this post. Here are the 12 criteria for part one of the test:
- 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.
- 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.
- 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.
- 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.
- 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.
- The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
- 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.
- The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
- 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.
- The business service provider can negotiate its own rates.
- Consistent with the nature of the work, the business service provider can set its own hours and location of work.
- 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.
As mentioned, if the hiring company can prove that all of the above elements are met, then it can do the Borello Test analysis and conclude that there is no employment relationship. Either way, even proving the above 12 elements are met can be a challenge. If even one of them is not met, then a company is stuck with the ABC Test from Dynamex, which tends to be far more favorable to finding an employment relationship than the Borello Test.
Read the full storty at California Cannabis Workers: Independent Contractor Exceptions – Lexology