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Ask The California Employment Tax And Payroll Tax Attorney – Ab-5 Has Been Repealed! – Say Hello To New Ab-2257 – Part 4 – New Labor Code Section 2777 – The Referral Agency Exemption

By Robert S. Schriebman



The California Legislature and Governor Newsom have taken a second look at AB-5, signed into law in September 2019 and have scrapped it.  AB-5 was repealed on September 4, 2020.  In its place we now have AB-2257.  What’s the difference?

The new legislation favors the entertainment industry and has provided many more new exemptions.  Gone are the laws that required domestic home workers such as live-in nannies and housekeepers to be treated as W-2 wage earners. Tutors are exempt even if they teach school curriculum so long as they are not hired by school districts.  Freelance writers and photographers are not restricted by the number of articles they produce or engagements photographed.

This article will review new Labor Code § 2777, the Referral Agency Exemption.  Before discussing this exemption, it is important for you to understand an overview of AB-2257, the Dynamex case, and the relevance of the Borello decision.

New Labor Code Sections

AB-2257 created new Labor Code §§ 2775-2787.  In a nutshell these new sections retain the ABC Standard set forth in AB-5.  Like AB-5, the new law basically states that all workers, unless exempt, are going to be considered employees unless the hiring entity can prove the following:

  1. 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.
  2. B. The person performs work that is outside the usual course of the hiring entity’s business.
  3. C. The person is customarily engaged in an independently established trade, occupation, or business or the same nature as that involved in the work performed.

In reading this series of articles it is important to keep in mind that “exemption” does not mean a complete escape from the old rules.   Those who are exempt under AB-2257 must still satisfy the test under the 1989 California Supreme Court decision in the Borello case. There are still hoops that one must jump through before one is home free.

Just because AB-5 has been repealed does not mean that the history behind the repealed act has also been repealed.  You need to know about the Dynamex case, the ABC Standard Test, and Borello.  This introduction will give you some background information that will be important in working with and understanding AB-2257.

Retroactive Impact of AB-2257

Does the new AB-2257 repeal AB-5 retroactively to January 1, 2020? It appears that it does.  New Labor Code § 2785(b) states that insofar as the application of the new series of exemptions would relieve an employer from liability, those exemptions will apply retroactively to existing claims and actions “to the maximum extent permitted by law.” §2785(d) states that if the employer can demonstrate that there has been compliance with the relevant exemption section under AB-2257, the holding in Dynamex will not apply to that employer.  The employer, however, must demonstrate compliance with the Borello decision.  What is unclear is what remedy an employer has for retroactive relief.  If payroll taxes were paid during 2020 for an occupation now exempt under the new law, will a claim for refund be allowed for the payment of 2020 payroll taxes that would not have been paid but for the new legislation?

One cannot truly understand and appreciate the impact of AB-2257 without a brief history lesson.  It is important to understand the impact of the Dynamex decision and perhaps most importantly, the lasting and ongoing impact of the Borello decision.

Dynamex Historical Background

At the end of April 2018, California Supreme Court published the decision in Dynamex Operations West, Inc. v The Superior Court of Los Angeles County.  This case has changed the playing field and given new definitions to “employer,” “employee,” and “employed.” The EDD’s famous 23 factor-test may no longer be applicable and the leading Supreme Court case of Borello 48 Cal.3d 341 may have also been thrown out. The new test is known as the “Suffer or Permit to Work” Standard. This new standard has three parts, any one of which, if met, will change the relationship of independent contractor to employer-employee. It is not a new test that the Supreme Court created on its own. Rather it has been around since 1916, but has been hidden in a wage order issued by the California Industrial Welfare Commission, but never been applied or interpreted by the courts until 2010 when it was discussed in another California Supreme Court Case known as Martinez v Combs 49 Cal.4th 35.  Wage Order No. 14, Cal. Code /regs., tit. 8, § 11140, subd. 2(C).

The Impact of the Borello Decision

In 1989 the California Supreme Court decided in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).  This case established a multi-factor test to determine whether or not an employer engaging an independent contractor has retained too much control over the relationship.  If so, the contractor is re-classified as an employee. We will examine these factors and how they impacted the Court’s Dynamex decision in our next article. It is still not clear in my mind whether the Supreme Court threw Borello under the buss.

The ultimate decision of the California Supreme Court was to uphold a Wage Order issued by the Industrial Welfare Commission (IWC) back in 1916 that established a test under the “suffer or permit to work” standard. In footnote 3 of the Decision, at page 3, the Court set forth the impact of an IWC Wage Order as follows: “In California, wage orders are constitutionally-authorized, quasi-legislative regulations that have the force of law. (Cal.Const., art.XIV, § 1; Lab.Code, §§ 1173, 1178, 1178.5, 1182, 1185; Industrial Welfare Com. v. Superior Court (1980) 27 Cal.3d 690, 700-703 (Industrial Wlf.Com.).)”

New Labor Code Section 2777

Labor Code § 2777 provides referral agency exemptions for specifically enumerated occupations including tutors, graphic designers, web designers, consultants, photographers, wedding and event planners, movers, minor home repairs, animal services, (including dog walking and dog grooming), pool cleaners, yard clean-up services, and interpreters.  The exemptions do not apply to janitorial services, couriers, transportation, trucking, retail, logging, agricultural labor, home care, or construction services other than minor home repair.  Section 2777(b)(2)(c)

The referral agency exemption does not apply to nursing registries or domestic home health care registries.  These rules are still found in CUIC §§ 606.5 and 687.2, respectively.

Certain exempt occupations have specific definitions:

  • The tutor exemption has been expanded to include all types of academic instruction, but does not include an individual who contracts with a local education agency or a private school for purposes of teaching in a classroom setting.
  • Animal services include services related to daytime and nighttime pet care including pet boarding.
  • Interpreting services has a broad-based application including governmental agencies and interpreters for the deaf. It is recommended that you review section 2777(b)(7).

To qualify for the exemption, the following conditions must be met and it is recommended that you review the provisions set forth in section 2777(a)(1-11).

  • The service provider may be a sole proprietor, partnership, LLP, LLC or corporation.
  • The service provider is customarily engaged in an independently established trade or business.
  • The service provider is free from the direction and control of the referral agency. It is important to understand that the element of control is present in most business relationships.  But the “control” that requires a worker to be treated as a W2 wage earner, is control over the details of the job as opposed to the control of the outcome.
  • If a professional license, permit, or certification is required for the type of work being performed for the agency’s clientele, the service provider shall certify to the referral agency that he/she has the required credentials.
  • A service provider must deliver services to the agency’s clientele under the service provider’s name without being required to deliver the services under the name of the referral agency.
  • If a business license or tax certificate is required within the jurisdiction wherein the services are to be rendered, the service provider must have the appropriate license or tax certificate.
  • The service provider must have its own tools, vehicles, and equipment to perform the services.
  • The referral agency cannot restrict the service provider’s services to only that rendered to the agency, the service provider is free to have clientele other than the referral agency.
  • The service provider sets his/her own hours in terms of work and is free to negotiate its own rates with the agency.
  • The service provider is free to accept or reject the agency’s clients and contracts without being penalized by the agency.


New Labor Code § 2777 governing referral agency exemptions cover many occupations that were restricted under AB-5. Keep in mind that even if you comply with all of the conditions set forth above, you are not home free.  EDD auditors are free to apply the tests set forth in Borello when it comes to issuing an assessment.


Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.  Mr. Schriebman is in private practice.  He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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