California considers almost all types of workers to be employees. There are, however, important circumstances in which workers may qualify as contractors. In my first article in this series, “Classification of Cannabis Workers in CaliforniaI explained the basics of classifying employees versus independent contractors. Today, I’m looking at some of the top independent contractor exceptions for California cannabis businesses.
Quick refresher on the classification of cannabis workers in California
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 blame on employers prove that workers are entrepreneurs by meeting all three of the following elements:
(A) The Individual is free from the control and direction of the Hiring Entity with respect to the performance of the Work, both under the Contract for the performance of the Work and in fact.
(B) The individual is performing work outside the normal course of business of the hiring entity.
(C) The person is usually engaged in an independently established trade, occupation or business of the same nature as that involved in the work being performed.
As I mentioned in my last post, although the test is short, it can still be difficult for employers to meet on it. Thus, the legislator designed some exceptions to the ABC test. I explain two below, each of which may be important for cannabis businesses.
Exceptions for B2B Independent Contractors
Sometimes cannabis companies think they can circumvent classification if they contract with an entity rather than a person. But it’s not always the case ! California has a B2B Independent Contractor Exception, but it’s an uphill battle to face. If a cannabis business contracts with a business (partnership, LLC, corporation, etc.), then for the B2B exception to apply, (1) the business must demonstrate that all TWELVE (!) of the above criteria below are filled in, and then (2) apply the factors from the Borello test I talk about at the bottom of this article. Here are the 12 criteria for the first part of the test:
- The Business Services Provider shall be free from the control and direction of the Contracting Business Entity in the performance of the Works, both under the Contract for the performance of the Works and in fact.
- The business service provider provides services directly to the contracting company rather than to the customers of the contracting company. This paragraph does not apply if the employees of the business service provider only perform the contracted services under the name of the business service provider and the business service provider regularly contracts with other companies.
- The contract with the business services provider is in writing and specifies the amount of payment, including any applicable rate of pay, for the services to be performed, and the due date for payment for those 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 place of business, which may include the residence of the Business Service Provider, that is separate from the business or place of work of the Contracting Business.
- The business service provider usually carries on an independent activity of the same nature as that involved in the work performed.
- The business service provider may contract with other businesses to provide the same or similar services and retain a customer base without restrictions from the hiring entity.
- The business service provider advertises and presents itself to the public as being available to provide the same or similar services.
- Consistent with the nature of the Work, the Business Service Provider will supply its own tools, vehicles and equipment to perform the Services, excluding such proprietary materials as may be required to perform the Services under the Contract.
- The business service provider can negotiate its own rates.
- In accordance with the nature of the work, the business service provider may set its own hours and place of work.
- The business service provider is not performing the type of work for which a license from the National Contractors Licensing Board is required, pursuant to Chapter 9 (beginning with Section 7000) of Division 3 of the Business and occupations.
As mentioned, if the hiring company can prove that all of the above elements are met, they can perform the Borello test analysis and conclude that there is no employment relationship. Either way, even proving that the above 12 elements are met can be a challenge. If even one of them is not met, a company is stuck with the ABC test of Dynamexwhich tends to be much more favorable to finding an employment relationship than the Borello test.
Exceptions for Independent Professional Services Contractors
The ABC test and Dynamex also do not apply to certain contracts for “professional services”, which has a narrow definition. Relevant to cannabis businesses, this may include some (but not all) marketing relationships, HR administrators, and artists. The qualifications are very specific, so companies can’t just assume that any marketing professional, for example, is exempt. In fact, as with the B2B independent contractor exception, recruiting firms still need to prove a number of factors – thankfully only six this time around – before proceeding with the Borello test analysis. These six factors are:
- The individual maintains a place of business, which may include their residence, that is separate from the hiring entity. Nothing in this paragraph prohibits an individual from electing to provide services at the Hiring Entity’s location.
- If the work is performed more than six months after the effective date of this section and the work is performed in a jurisdiction that requires the individual to have a business license or business tax registration, the individual has the business license or commercial tax registration required in order to provide the services under the contract, in addition to any professional licenses or permits required for the individual to practice their profession.
- The individual has the ability to set or negotiate their own rates for services rendered.
- Outside of project completion dates and reasonable business hours, the individual has the flexibility to set their own hours.
- The individual is usually engaged in the same type of work performed under contract with another hiring entity or presents themselves to other potential clients as being available to perform the same type of work.
- The individual habitually and regularly exercises discretion and independent judgment in the performance of the services.
As you can see, these factors overlap in many cases with the exception of the B2B independent contractor. Depending on the circumstances, both independent contractor exceptions could apply, requiring separate analyses.
Borello test and independent contractor exceptions
I talked a bit about the Borello test, and now I will tell you what it is. The test comes from a 1989 California Supreme Court case titled SG Borello & Sons, Inc. v. Industrial Relations Department. The test analyzes the facts surrounding a company’s relationship with a worker to determine if the worker is an employee. Unlike the rigid ABC test, the Borello test weighs various factors. So if, say, one or two of the factors weren’t met, it wouldn’t necessarily immediately mean that a person is an employee. Here are the factors – all THIRTEEN (!) of them:
- If the worker providing services presents himself as carrying on a profession or business separate from that of the employer;
- Whether the work is an integral or regular part of the employer’s business;
- Whether the employer or the worker provides the instruments, tools and place for the worker to perform the work;
- Whether the worker has invested in the business, for example in the equipment or materials required for his job;
- If the service provided requires a particular skill;
- The type of occupation, and whether the work is usually carried out under the direction of the employer or by a specialist without supervision;
- The worker’s ability to make a profit or loss based on his management skills;
- The duration during which the services must be performed;
- The degree of permanence of the employment relationship;
- The method of payment, whether by time or by task;
- If the worker hires his own employees;
- If the employer has the right to dismiss at will or if a dismissal gives rise to an action for breach of contract; and
- Whether or not the worker and potential employer believe they are creating an employer-employee relationship (this may be relevant, but the legal determination of employment status is not based on whether the parties believe they have an employer-employee relationship).
As you can see again, this stuff is complicated and there is some level of overlap with the elements of the B2B exceptions or independent professional services contractors I discussed above. To fully determine whether or not someone is an employee takes a lot of elbow grease. In our experience, this can be a huge inconvenience for Californian cannabis businesses – but even more so for businesses coming from other states or countries that aren’t used to the extreme atmosphere of California’s labor laws. And it’s extreme!
Going through a multi-factor independent contractor exception analysis every time a company wants to move into a new position is not easy and for some companies it is not a financially viable option. Fortunately for many cannabis businesses, a good legal advisor can analyze issues quickly and help companies establish policies to streamline the process when new contractors are hired.
I should note that even if an employer goes through the above process and is very confident that they have found a strong independent contractor exception, they are not necessarily immune from liability. Workers regularly sue for misclassification, even in some cases where such claims have no basis. Going through the analysis can’t make a business bulletproof, but it can prepare it to defend against these allegations.