Sometimes cannabis businesses think they can get around classification
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.
Professional services independent contractor exceptions
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:
- The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity. Nothing in this paragraph prohibits an individual from choosing to perform services at the location of the hiring entity.
- If 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 required business license or business tax registration in order to provide the services under the contract, in addition to any required professional licenses or permits for the individual to practice in their profession.
- The individual has the ability to set or negotiate their own rates for the services performed.
- Outside of project completion dates and reasonable business hours, the individual has the ability to set the individual’s own hours.
- The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.
- The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.
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.
Borello Test and independent contractor exceptions
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:
- Whether the worker performing services holds themselves out as being engaged in an occupation or business distinct from that of the employer;
- Whether the work is a regular or integral part of the employer’s business;
- Whether the employer or the worker supplies the instrumentalities, tools, and the place for the worker doing the work;
- Whether the worker has invested in the business, such as in the equipment or materials required by their task;
- Whether the service provided requires a special skill;
- The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision;
- The worker’s opportunity for profit or loss depending on their managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job;
- Whether the worker hires their own employees;
- Whether the employer has a right to fire at will or whether a termination gives rise to an action for breach of contract; and
- Whether or not the worker and the 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’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.
I should note that even if an employer goes through the above process and is very confident that it found a solid independent contractor exception, they are not necessarily immune from liability. Workers routinely sue for misclassification, even in some cases where such claims have no merit. Going through the analysis can’t make a company bulletproof, but it can prepare it to defend against these claims. In the coming days, I’ll explore more issues with classifying California cannabis workers.
Source: Canna Law Blog