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Business to Business or Employer/Employee

As California’s gig economy grows and more and more workers try their hand at freelancing, relationships between businesses face new challenges to avoid running afoul of employment laws. Of particular concern are those relationships that involve single-person businesses. Single person businesses — whether they be independent contractors, freelancers, or sole proprietors — all involve workers who have chosen the freedom of working their own pace and discretion, usually by providing work to other businesses.

When these single person businesses get too cozy with another business, the question arises as to whether the relationship is truly business to business or employer/employee. As of 2020, the answer lies within newly-enacted Labor Code section 2750.3, which defines employment relationships in California by partially codifying existing caselaw.

California Labor Code section 2750.3 provides a means to determine whether an employment relationship exists between a business and a “business server provider” (i.e., freelancer or independent contractor). In order to resolve that question, one of two tests (“Right to Control” test and “ABC” test) are used. In a nutshell, the “Right to Control test” focuses on whether the contracting business had the right to control the manner and means of accomplishing the work performed.

Under the ABC Test, the worker must be free from the control and direction of the hiring entity in connection with the performance of the work; the worker must performs work that is outside the usual course of the hiring entity’s business (e.g., an electrician fixing lights in a restaurant); and the worker must be actually engaged in his or her own established business.

The “Right to Control Test” is used if the contracted business is (1) formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation and (2) all of the following criteria are met:

  • 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;
  • The contract with the business service provider is in writing;
  • 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 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 actually contracts with other businesses to provide the same or similar services and maintains 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;
  • The business service provider provides its own tools, vehicles, and equipment to perform the services;
  • 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 Contractor’s State License Board is required.

If these criteria aren’t met, then the ABC test is used.

Regardless of the test used, the stakes are high. While independent contractors and employees may perform similar work, both are treated much differently under the law. Independent contractors are not protected by workplace antidiscrimination laws, wage and hour laws, and/or family and medical leave protections, and independent contractors can’t access either unemployment insurance or worker’s compensation benefits. This is particularly jarring when an independent contractor finds herself reporting to the same location, performing the same duties, and working the same hours as her “employee” counterpart.

The information in this article is not intended to, nor should it be considered to be, legal advice, nor does it create an attorney/client relationship. While this article contains a non-exhaustive discussion on recent laws or topics effecting California employees and/or employers, the laws outside of California and/or in federal court may be different than those discussed herein. Further, there is absolutely no assurance that any statement contained in this article is true, correct or precise. The law varies from place to place and it evolves over time—sometimes quite quickly. Even if a statement made herein about the law is accurate, the law may have changed, been modified or overturned by subsequent development since the entry was posted. The article is, at best, of a general nature and cannot substitute for the advice of a licensed professional who can apply it to the particular circumstances of a case. It is intended to initiate further consideration, inquiry, or consultation on the topics discussed. Please contact Urbanic & Associates, Inc. for a full evaluation of your case. In the alternative, please contact a local bar association, law society or similar association of jurists in your legal jurisdiction to obtain a referral to a competent legal professional if you do not have other means of contacting an attorney.