California ABC Test: Contractor or Employee?

Is a worker an independent contractor or employee under the California Supreme Court's Dynamex decision (the ABC test)?

In April 2018, the California Supreme Court issued a decision stating a new standard for determining whether workers should be classified as independent contractors or employees. The standard presumes that workers are employees and places the burden on employers to establish that independent contractor status is appropriate under a new "ABC test." Currently, the ABC test applies only to the California Wage Orders, but it may be expanded to apply to other aspects of the Labor Code and state taxes.What is the ABC test?Even before the Dynamex decision, to "employ" was defined as to "suffer or permit to work," a definition derived from child labor law statutes. Under the ABC test, a worker is presumed to be an employee for wage order purposes unless the putative employer proves all of the following:

  • (A) that the worker 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) that the worker performs work that is outside the usual course of the hiring entity's business; and
  • (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Thoughts on Each ProngProng A: The court noted that a business "need not control the precise manner or details of the work" in order for a court to find that it maintained the necessary control sufficient to lead to a finding of employee status. This prong is similar to the common law standard previously used to determine employee status under Borello.Prong B: This prong is concerning for businesses who use contractors to deliver their core product/service. The court noted that the clearest example is where workers' "services are provided within the usual course of the business" and therefore would "ordinarily be viewed by others as working in the hiring entities' business."A California Court of Appeal decision rendered in Curry v. Equilon Enterprises, LLC just weeks after the Dynamex decision suggests that platform or referral-type businesses that don't exercise control over employees under Prong A could be found as a distinct business. While Curry found that the ABC test does not apply to the joint employer theory of employment, out of an abundance of caution, it still applied the ABC test to determine whether an employee of a company that leased services stations from Shell was also an employee of Shell under a theory of joint employment. The court found that the worker would not be not an employee of Shell because Shell was not in the business of operating fueling stations - it was in the business of owning real estate and fuel.Prong C: If a worker has independently established their own business providing the same services to the general public, the company will likely meet this third prong. If they are "simply designated as an independent contractor by the unilateral action of a hiring entity," it is much more likely they will be found to be an employee. While the worker doesn't necessarily need to incorporate or license their business to meet this prong, the simple fact that a company doesn't prohibit outside work or business is not enough to find that workers have independently decided to go into business for themselves.Consequences for California EmployersThe opinion applies only to California's Wage Orders, and therefore to non-exempt employees. However, where workers are classified as employees, the employer must pay Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, must withhold taxes from wages, must provide worker's compensation insurance, and comply with statutes governing wages, hours, and working conditions.

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