California AB 2257: Exemptions, Borello Test, and Prop 22 Boundary

California AB 2257’s independent contractor exemptions let workers in specific professional, creative, business-to-business, referral-agency, and music industry roles skip the strict ABC test and be classified instead under the older, more flexible Borello test, provided they meet the checklist attached to their exemption.¹ Signed on September 4, 2020, the law replaced and broadened the exemptions first created by AB 5, and it is the statute that decides whether a California freelancer, consultant, musician, or contracted business can lawfully be paid as an independent contractor.

Why the ABC Test Is What You’re Trying to Escape

California presumes that anyone providing labor for pay is an employee. To rebut that presumption, a hiring entity must satisfy all three prongs of the ABC test codified at Labor Code Section 2775: the worker is free from the hiring entity’s control, performs work outside the entity’s usual business, and is already engaged in an independent trade of the same type.²

Miss any one prong and the worker is an employee. The second prong is the one that breaks most arrangements: a design agency that hires a freelance designer cannot credibly say design work sits outside its usual business. That is the trap AB 2257’s exemptions were written to solve.

Professional Services Exemption

Labor Code Section 2778 exempts a long list of professional services occupations from the ABC test, so long as the hiring entity can show the worker meets six baseline conditions:³

The worker maintains a business location separate from the hiring entity. A home office counts.
The worker holds a business license or tax registration if the local jurisdiction requires one, for work performed more than six months after the statute took effect.
The worker can set or negotiate their own rates. The ability to negotiate is enough; unilateral rate-setting is not required.
Outside of project deadlines and reasonable business hours, the worker sets their own schedule.
The worker either performs the same type of work for other clients or holds themselves out as available to.
The worker regularly exercises discretion and independent judgment in performing the services.

Covered professions include freelance writers, editors, translators, copy editors, illustrators, newspaper cartoonists, photographers, photojournalists, fine artists, graphic designers, and specialized tutors, among others. AB 2257 dropped the AB 5 cap that had limited freelance writers, photographers, and editors to 35 submissions per year for a single media outlet.

Some of these professions carry extra conditions on top of the six. Freelance writers, translators, editors, copy editors, and illustrators must also work under a written contract that specifies rates and payment timelines, must not primarily work at the hiring entity’s location, cannot be replacing an employee doing the same work at the same volume, and cannot be restricted from taking on other clients.

Business-to-Business Exemption

The B2B exemption in Labor Code Section 2776 applies when one business entity (sole proprietor, LLC, partnership, or corporation) contracts to provide services to another. It carries the longest checklist in the statute; the contracting business must show all twelve of the following:⁴

The service provider is free from the contracting business’s control over how the work is performed, in the contract and in reality.
The provider serves the contracting business itself, not that business’s customers, unless the provider’s own employees do the work under the provider’s name and the provider regularly contracts with other businesses.
A written contract specifies payment amount or rate and due date.
The provider holds any required business license or tax registration in the jurisdiction where the work is performed.
The provider has a separate business location. Home offices qualify.
The provider is customarily engaged in an independent business of the same type.
The provider can contract with other businesses for the same or similar work, without restriction from the hiring entity.
The provider advertises and holds itself out publicly as available for similar services.
The provider supplies its own tools, vehicles, and equipment, aside from proprietary materials the contracting business must supply.
The provider can negotiate its own rates.
The provider can set its own hours and choose its work location, consistent with the nature of the work.
The work is not the type that requires a license from the Contractors’ State License Board.

That last condition catches people. If the work requires a state contractor’s license, such as construction, electrical, or plumbing, the B2B exemption is unavailable and the ABC test applies, regardless of how cleanly the arrangement satisfies the other eleven items.

Referral Agency Exemption

When a service provider connects with clients through a referral agency, Labor Code Section 2777 supplies a separate exemption. AB 2257 broadened this route to reach consulting, youth sports coaching, caddying, wedding and event planning, and animal services, among other categories.⁵

The agency must show the provider meets conditions including:

The provider is free from the referral agency’s control over how the work is performed.
The provider holds any required business licenses, professional licenses, or permits.
The provider works under their own name, not the agency’s.
The provider supplies their own tools.
The provider is engaged, or was previously engaged, in an independent business of the same type.
The agency does not restrict the provider from maintaining other clients or working with competing agencies.
The provider sets their own rates, negotiates with the client, or is free to accept or reject client-set rates.
The provider sets their own hours and work terms, or negotiates them with the client directly.

Referral agencies must also keep licensing certifications on file for at least three years.

Music and Entertainment Industry Exemptions

AB 2257 carved out substantial space for the music industry. Recording artists, songwriters, lyricists, composers, record producers, directors, musical engineers, mixers, and managers of recording artists are exempt from the ABC test when the work involves creating, marketing, promoting, or distributing sound recordings or musical compositions.

The exemption has edges. The statute identifies circumstances where musicians and vocalists in the industry or performing arts remain employees, and music and performing arts instructors were not written into the exemption, so a piano teacher hired through a music school likely stays under the ABC test. Individual performance artists get their own exemption with its own conditions, including retaining artistic control over the performance.

What Borello Actually Requires

Qualifying for an exemption does not make a worker an independent contractor automatically. It shifts the analysis to the Borello test from the California Supreme Court’s 1989 decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations.⁶

The central Borello question is whether the hiring entity has the right to control the manner and means of the work, not just the result. Secondary factors round out the picture:⁷

Whether the worker operates a distinct occupation or business
Whether the work is a regular part of the hiring entity’s business
Who supplies the tools, equipment, and workspace
Whether the worker has invested in the business
Whether the work requires specialized skill
The worker’s opportunity for profit or loss based on managerial decisions
How long the working relationship lasts
Whether payment is by time or by the job
Whether the worker hires their own employees
Whether the hiring entity can terminate at will or only for cause
Whether both parties believe they’ve created an employment relationship

No single factor decides the case. That flexibility is the whole point of exemption: under Borello a worker can miss a factor or two and still qualify as an independent contractor if the overall relationship supports it, whereas under the ABC test one miss ends the analysis.

Boundary: App-Based Drivers Are Governed by Prop 22, Not AB 2257

If you drive for a rideshare or delivery platform, AB 2257’s exemptions do not decide your classification. California voters passed Proposition 22 in November 2020, two months after AB 2257 took effect, classifying app-based rideshare and delivery drivers as independent contractors outside both the ABC and Borello tests. The California Supreme Court upheld Proposition 22 in July 2023. Prop 22 drivers receive a separate package of protections, including an earnings guarantee and healthcare subsidies, distinct from traditional employee benefits. Freelance or contract work delivered through a platform that merely matches you with clients may still fall under AB 2257’s referral agency exemption or another category.

What Misclassification Costs

Getting classification wrong is expensive. Labor Code Section 226.8 defines willful misclassification as voluntarily and knowingly treating a worker as an independent contractor to avoid employee status, and sets civil penalties of $5,000 to $15,000 per violation. Where the state finds a pattern or practice of misclassification, penalties rise to $10,000 to $25,000 per violation.⁸

Those fines sit on top of unpaid wages the worker should have received, including minimum wage and overtime, plus payroll taxes never withheld or paid. Misclassified workers can seek reimbursement of business expenses they covered out of pocket, and the employer picks up additional exposure for the workers’ compensation, unemployment insurance, and paid sick leave the worker never received.

1
California Legislative Information. California AB 2257 – Worker Classification: Employees and Independent Contractors: Occupations: Professional Services
2
California Legislative Information. California Code LAB – Section 2775
3
California Legislative Information. California Code LAB – Section 2778
4
California Legislative Information. California Code LAB – Section 2776
5
California Legislative Information. California Code LAB – Section 2777
6
Justia. S. G. Borello and Sons Inc. v. Department of Industrial Relations
7
State of California Department of Industrial Relations. Independent Contractor Versus Employee
8
California Legislative Information. California Code LAB 226.8 – Employment Regulation and Supervision