New Labor Law May Offer a Pathway to Independent Contractor Status

Sara Jasper, JD, Staff Attorney and
Catherine L. Atkins, JD, Deputy Executive Director
The Therapist
November/December 2020

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As a result of California’s increasingly stringent labor laws, it can be difficult for LMFTs1 and the businesses that want to hire them to engage in independent contractor relationships. The California Supreme Court’s 2018 ruling in the Dynamex Operations West, Inc. v. Superior Court case2 and the expansion of the case a year later, via California Assembly Bill 5 (AB 5),3 left many of the state’s independent contractors and the businesses who wish to contract with them without a lot of clarity and seemingly few options.

On September 4, 2020, Governor Newsom signed into law California Assembly Bill 2257.4 The revised labor laws, which went immediately into effect, amend and expand the “business-to-business exemption” previously set forth in AB 5. This exemption may prove beneficial to businesses that want to enter into independent contractor agreements with other corporations, partnerships or sole proprietorships. This article will review the new business-tobusiness exemption of AB 2257, its potential applications to LMFTs, and the current tests for independent contractor status in California.

Historical Classification of Independent Contractors
Over the last thirty years, there have been numerous shifts regarding how employers must assess independent contractor classification:

The New Business-to-Business Exemption
(“The AB 2257 Test”)
While not without flaws, the new business-to-business exemption5 does improve the ability of psychotherapy businesses and LMFTs to form independent contractor relationships and avoid having to analyze those relationships via the stricter ABC Test (outlined below). If all of the AB 2257 criteria are met, the business service provider’s status (employee or independent contractor) is then governed by the somewhat less burdensome Borello Test (also, outlined below).

“Business Service Provider”
As you read through the AB 2257 test criteria below, the term “business service provider” refers to the business attempting to be classified as the independent contractor. Ultimately, it is the responsibility of the “contracting business” hiring the business service provider as an independent contractor to demonstrate that an independent contractor relationship is appropriate given all of the requirements set forth in the AB2257 Test and the Borello test.

The “AB 2257 Test”—All Criteria Must Be Met:

1. The business service provider has a business that is formed as a sole proprietorship, partnership, limited liability company, limited liability partnership or corporation;
2. The business service provider is free from the control and direction of the contracting business in connection with the performance of the work, both under the contract for the performance of the work and in fact;
3. The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. This criterion 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;
4. 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;
5. If 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;
6. 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;
7. The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed;
8. 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;
9. The business service provider advertises and holds itself out to the public as available to provide the same or similar services;
10. 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;
11. The business service provider can negotiate its own rates; and
12. Consistent with the nature of the work, the business service provider can set its own hours and location of the work.

The sections in the AB 2257 Test that require the most analysis for LMFTs are highlighted and discussed below:

Section 1—Business Formation: While an LMFT can organize their business as a sole proprietor or a corporation, if the LMFT (business service provider) would like to take advantage of the business-tobusiness exemption, we strongly recommend incorporating as a professional corporation. For further reading on professional corporations, see CAMFT’s article titled, “Marriage and Family Therapy Professional Corporations Common Questions Answered,” by Ann-Tran-Lien, JD.”⁶

Section 2 – Control and Direction: A business service provider who serves as an independent contractor must be free from the control and direction of the contracting business. This means the contracting business should only have the right to control or direct the result of the work completed by an independent contractor, but does not have the right to control the details of how the services will be performed.⁷ For example, the contracting party should not have control over the independent contractor’s work schedule (start and stop times, breaks, lunch, etc.) and when and how the independent contractor writes their patient treatment notes.

Section 3—Services to Customers and Regularly Contracts with Other Businesses: The business service provider (independent contractor) must provide services directly to the contracting business and not the customers, unless 1) the business service provider’s employees are performing the services under the contract, and 2) the business service provider regularly contracts with other businesses.

Unfortunately, this Section has caused substantial confusion as to how the business service provider (independent contractor) must set up its business. The most cautious approach to ensure compliance is that the business service provider set up as a professional corporation⁸, and classify themselves as an employee. ⁹ In classifying themselves as employees within their own corporation, the business service providers would be in compliance with the Section 3 criteria.

In addition, Section 3 requires that the business service provider (independent contractor) also regularly contracts with other businesses. The intent of this section has been clarified that while the desire is for independent contractors to contract with multiple businesses, they do not have to have multiple contracts as long as they are free10 to have multiple contracts.¹¹

What AB 2257 Does Not Do for LMFTs and Their Businesses
Business relationships that qualify for the business-to-business exemption under the AB 2257 Test are not automatically free to enter into independent contractor relationships. Qualifying under the AB 2257 Test simply means the business relationships in question are subject to review under the arguably less challenging standards of the Borello Test instead of the ABC Test. Psychotherapy businesses that want to hire LMFTs as independent contractors must still be able to demonstrate that the relationship passes the Borello Test as set forth below.

The Borello Test
A. The primary test factor is “whether the employer has the right to control the manner and means (hours, location, etc.) of accomplishing the result desired.” If employer has control over the manner and means of accomplishing the desired result, this suggests an employee status.

B. The secondary test factors include:

i. If the employer has the right to terminate the worker at will without cause, this suggests an employee status;

ii. If the worker is engaged in a distinct occupation or business, this suggests an independent contractor status;

iii. If the work is the kind usually performed under supervision or close direction, this suggests an employee status;

iv. If the service requires skills of a particular occupation or specialist, this suggests an independent contractor status;

v. If the employer supplies the instruments, tools and place for performing the work, this suggests an employee status; vi. If the length of time for which the services are to be performed is temporary and fixed, rather than indefinite, this suggests an independent contractor status;

vii. If the worker is paid by time, e.g. hourly/weekly/monthly, rather than being paid per job, this suggests an employee status;

viii. If the worker’s services are a part of the hiring entity’s regular business, this suggests an employee status; and

ix. If the parties believe they are creating an employer/employee relationship, this suggests an employee status.

Unless the person hired is a specifically exempted professional (i.e., a psychologist) or exempted under the AB 2257 Test “business-to- business” exemption (outlined above), all other work arrangements now fall under the ABC Test to determine if the worker must be classified as an independent contractor.

The ABC Test – Utilized under Dynamex and AB 5

A. The independent contractor is free from control and direction of the employer (both under contract and in fact);

B. The independent contractor is performing work that is outside the usual course of the hiring entity’s business; ¹² and,

C. The independent contractor is engaged in an independently established business of the nature as the work performed for the hiring entity. ¹³

Many mental health employers will not meet the requirements of this Test. However, it is worth exploring further with your employment attorney or human resources generalist if an employer believes that the contractor is able to satisfy all three prongs in the ABC Test. Some questions to consider for employers when reviewing the above three prongs with your attorney or human resources specialist:

• Prong A: It is helpful to use the Borello factors with your employment attorney here as an assessment tool.
• Prong B: Is the independent contractor really performing a different type of work than the employer? Are there therapists working for the employer doing similar work as the independent contractor? For example, is the supervisor providing only supervision and not therapy services to the mental health agency? Is the therapist providing therapy to the school’s students? Is the therapist providing therapy to, for example, the OBGYN’s fertility clients?
• Prong C: Is the independent contractor an entity (such as a sole proprietor)? Does the independent contractor provide services to numerous different work settings? Does the independent contractor hold themselves out for hire by numerous work settings?

Potential Consequences of Misclassifying Workers and Having Unlawful Business Relationships

The penalties for misclassification of a worker and/or having unlawful business relationships are significant. Employers/ work settings that fail to carefully vet the requirements for classifying workers and entering into certain types of business relationships could face stiff penalties. Under California Labor Code § 226.8, employers are subject to a civil penalty between $5,000 to $15,000 for each violation for willful misclassification of an individual as an independent contractor. If it is found to be a pattern (i.e., numerous employees misclassified), the civil penalty is between $10,000 and $25,000 for each violation.

Independent contractors could also be entitled to recover all expenses or damages incurred because they were improperly classified as independent contractors, such as additional tax liability, benefits, wages, meal break penalties, rest break penalties, wage statement penalties, waiting time penalties, unpaid overtime, minimum wage and expense reimbursements related to operating personal vehicles for business purposes and operating personal cell phones for business purposes. Contractors would also be entitled to recover interest, costs and attorneys’ fees.

Employers who misclassify workers are also required to post a “prominent” notice on their public website stating, among other things, that they have “committed a serious violation of the law” by willfully misclassifying employees, and directing any other employees who feel they have been misclassified to contact the Labor and Workforce Development Agency.

In addition to these remedies, the Attorney General, district attorneys, and city attorneys may file actions for injunctive relief against employers to prevent them from continuing to misclassify employees as independent contractors.

It is perhaps worth noting that Governor Newsom’s 2020 budget included more than $20 million specifically for misclassification enforcement actions.

Given the penalties employers could face for labor law violations, CAMFT strongly recommends that any employer, or work setting, that hire independent contractors have their business model assessed by an employment attorney or human resources specialist immediately. It is the employer, not the independent contractor, who must demonstrate proper classification of its workers and business relationships.

Unanswered Questions
The future of independent contractor law is somewhat unknown. Due to the controversial nature of California’s worker classification laws and the impact the laws’ restrictions are having on business in California, there is uncertainty around what the laws will ultimately require and achieve.14 As of this fall, there were six lawsuits in play (more may be on the horizon) which could further alter the independent contractor landscape.

Conclusion
California is known for being a state with significant consumer protection laws. Recent labor law cases and statutory law developments suggest that the focus on protection of workers’ rights will continue as well. The recent labor case decisions and statutory law adoptions make it clear that leaders are focused on protecting workers’ rights. This focus on workers’ rights is a national trend. At least 20 states have invoked stronger worker protections through some form of an ABC Test thereby making it more difficult for businesses in many states across the United States to classify their workers as independent contractors instead of employees. While the laws that resulted from AB 5 and now AB 2257 have room for improvement and may yet go through revisions, one thing is certain: businesses must be cautious about establishing independent contractor relationships. Psychotherapy businesses that want to work with independent contractors should consult with employment law attorneys or human resource specialists to ensure appropriate classification of workers and compliance with California law.

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Sara Jasper, JD, CAE, is a staff attorney for CAMFT. Sara is available to answer member calls regarding legal, ethical, and licensure issues. Catherine L. Atkins, JD, is an attorney and the Deputy Executive Director at CAMFT.

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Endnotes

¹ This discussion of the new labor laws and the business-to business exemption are also applicable to LCSWs and LPCCs.

² Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, Charles Lee, et al, 4 Cal. 5th, 903, April 2018.

³ Now repealed California Labor Code Section 2750.3.

⁴ California Assembly Bill 2257 added Article 1.5 (Section 2775-2787) to Chapter 2 of Division 3 of the California Labor Code and repealed section 2750.3 of the California Labor Code (widely known as AB 5). The bill also amended and added to Sections of California’s Revenue and Taxation Code.

⁵ See California Labor Code Section 1776.

⁶ See CAMFT article at: https://www.camft.org/Resources/Legal-Articles/Chronological-Article-List/marriage-and-family-therapyprofessional-corporations-common-questions-answered.

⁷ See CAMFT article at: https://www.irs.gov/businesses/smallbusinesses-self-employed/independent-contractor-defined.

⁸ See CAMFT article at: https://www.camft.org/Resources/Legal-Articles/Chronological-Article-List/marriage-and-family-therapyprofessional-corporations-common-questions-answered.

⁹ Many psychotherapy businesses that seek to contract with LMFTs as independent contractors are typically looking for LMFTs to provide therapy services directly to their patients. This new language allows employees of the business service provider (or the independent contractor) to offer services directly to customers of the contracting business. In other words, psychotherapy practices who desire to independently contract with LMFTs to provide clinical services directly to their patients must ensure that the LMFT is an employee of a business service provider (the independent contractor). For example, an LMFT who is incorporated as an MFT Professional Corporation and is both the owner and employee (pays taxes as an employee) of their professional corporation will meet the definition of “employee” under Section 3 of the AB 2257 Test and can provide services directly to the patients of a contracting business. Some may argue that sole proprietors may qualify under this section. However, the current and cautious interpretation is that sole proprietors are not employees of their businesses. Therefore, it is recommended that sole proprietor LMFTs who desire to independently contract with other psychotherapy entities to first determine if they would otherwise meet the other 11 criterion of the AB 2257 Test and the Borello Test. If so, they may want to consider incorporating as a psychotherapy professional corporation. This could enable the LMFT who is an owner and employee of their professional corporation to offer services directly to the patients of the contracting business under Section 3 of the Test.

¹⁰ “A Letter to the Journal” written by the author of AB 2257, Assemblywoman Lorena Gonzalez acknowledges this and clarifies that “it is not the intent of the author to suggest that under this section a business service provider must contract with more than one contracting business in order to satisfy the conditions under Section 2776.” (Letters to the journal are used to clarify legislative intent.) Section 8 of the Test is another helpful revision to AB 5 as it no longer requires the independent contractor to actually contract with other businesses, but indicates that the independent contractor can contract with other businesses. This means that independent contractors do not have to have multiple contracts as long as they are free to have multiple contracts. This interpretation is consistent with the clarification as to legislative intent offered in the Letter to the Journal cited above.

¹¹ AB 2257 also clarifies that when two bona fide businesses are contracting with one another based on the conditions set forth in the business-to-business exemption, the decision as to whether an individual worker (who is not acting as a sole proprietor or formed as a business entity), is an employee or independent contractor of the business service provider or contracting business will be determined by the ABC test. This provision is widely interpreted to mean that a business service provider itself may be a contractor, but the persons working for that business service provider would be classified based on the factors set forth in the ABC test.

¹² “A Letter to the Journal” written by the author of AB 2257, Assemblywoman Lorena Gonzalez acknowledges this and clarifies that “it is not the intent of the author to suggest that under this section a business service provider must contract with more than one contracting business in order to satisfy the conditions under Section 2776.” (Letters to the journal are used to clarify legislative intent.)

¹³The phrase “outside the usual course of the hiring entity’s business” means that the independent contractor should be engaged in work that the business hiring the independent contractor does not do. For example, if all other conditions for independent contractor status are met, a psychotherapy practice would be able to contract with an Information Technology firm to handle the practice’s IT system because the IT firm is in a different line of work. On the other hand, a psychotherapy practice would not be free to independently contract with another LMFT for the purpose of having the LMFT to see clients of the practice.

¹⁴California Proposition 22, the App-Based Drivers as Contractors and Labor Policies Initiative, is on the ballot in California as an initiated state statute on November 3, 2020. Proposition 22 does not impact LMFTs, but directly relates to app-businesses such as Uber.

 

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This article is not intended to serve as legal advice and is offered for educational purposes only. The information provided should not be used as a substitute for independent legal advice and it is not intended to address every situation that could potentially arise. Please be aware that laws, regulations and technical standards change over time. As a result, it is important to verify and update any reference or information that is provided in this article.