California Gov. Gavin Newsom on Sept. 4 signed AB 2257, legislation that clarifies how the state’s employment laws apply to services provided by state-licensed and state-certified real estate appraisers, allowing them to work as independent contractors.

 

Last year, the state enacted AB 5, creating a three-part test, commonly known as the “ABC” test, to determine if workers are employees or independent contractors for purposes of the state’s Labor Code and Unemployment Insurance Code and the wage orders of the Industrial Welfare Commission. A person who provides labor or services for remuneration is considered an employee rather than an independent contractor unless the hiring entity demonstrates: (A) the person is free from the control and direction of the hiring entity in connection with the performance of the work; (B) the person performs work that is outside the usual course of the hiring entity’s business; and (C) the person is customarily engaged in an independently established trade, occupation or business.

 

Prior to AB 5, the employment relationship between a contracting entity and a service provider was determined using a multifactor test commonly known as the “Borello” test. Many appraiser/client contractual relationships, including some between appraisers, appraisal firms and appraisal management companies, satisfied each prong of the Borello test, and the employment relationship was defined as that of an independent contractor. 

 

However, once AB 5 took effect, appraisers in California expressed concern that the ABC test, specifically the “B” prong, meant they would be considered employees of some clients, specifically appraisal firms and AMCs. Appraisers, appraisal firms and AMCs were worried that it would be determined that they were in the business of providing appraisal services, to the extent that appraisers would not be performing work “outside the usual course of the hiring entity’s business.” In contrast, AB 5 did not affect the independent contractor nature of the relationships between appraisers and other client groups, such as private businesses and individuals, direct engagement lenders, government agencies and law firms.  

 

The new legislation clarifies that contractual services provided by licensed and certified appraisers are “professional services” for which the Borello test, rather than the ABC test, would apply. It requires six factors to be satisfied before the Borello test can be considered : 1) the appraiser must maintain a separate business location (a home office is permitted); 2) the appraiser must have all appropriate business licenses and tax registrations; 3) the appraiser must have the ability to set or negotiate their own rates; 4) the appraiser must have the ability to set their own hours; 5) the appraiser must provide services to other entities or hold themselves out as being available to have other customers; and 6) the appraiser must be permitted to exercise discretion and independent judgement in the performance of the services. If all six factors are satisfied, then the Borello test could be used to determine whether the business relationship is that of an independent contractor or employee.