by Griffin Thorne, Attorney at Harris Bricken
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.
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.
(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.
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:
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.
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 businesses cannot just assume that any marketing professional, for example, is exempt. In fact, like with the B2B independent contractor exception, hiring companies still need to prove a number of factors – fortunately, only six this time – before doing the Borello Test analysis. Those six factors are:
As you can see, these factors overlap with the B2B independent contractor exception in many instances. Depending on the circumstances, both independent contractor exceptions could apply, necessitating separate analyses.
I’ve talked a bit about the Borello Test, and now I’ll explain what it is. The test comes from a 1989 California Supreme Court case entitled S. G. Borello & Sons, Inc. v. Department of Industrial Relations. The test analyzes facts around 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 were not met, that would not necessarily immediately mandate that a person is an employee. Here are the factors – all THIRTEEN (!) of them:
As you can see again, this stuff is complicated and there’s some level of overlap with the elements of the B2B or professional service independent contractor exceptions I discussed above. To fully determine whether someone is or is not employee requires a lot of elbow grease. In our experience, this can be a massive annoyance for California cannabis businesses – but even more so for companies coming into the state from other states or countries who are not used to California’s extreme employment law atmosphere. And it is extreme!
Going through a multi-factor independent contractor exception analysis each time a company wants to fill a new role is not easy and for some businesses, not a financially viable option. Fortunately for many cannabis businesses, good legal counsel can analyze the issues quickly and help companies establish polices to streamline the process when new contractors are engaged.
Re-published with the permission of Harris Bricken and The Canna Law Blog
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