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California Rewrites the Independent Contractor Test – What Your Business Needs To Do Now to Pass It

This week, the California Supreme Court rejected the old “totality of circumstances” test to determine if a worker was properly classified as an independent contractor in favor of a new “ABC test” under which employers will be required to classify most workers as employees.

Now, to qualify a worker as an independent contractor in California, the hiring party must demonstrate that:

A. The worker is free (contractually and in fact) from the control and direction of the hirer in connection with the work; AND

B. The worker performs work that is not the hiring entity’s usual business; AND

C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The worker must satisfy all three tests (A, B, and C) to qualify as an independent contractor in California. Beyond rejecting the old California multi-factor test in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, this decision also underscores the legal presumption that workers in California are fundamentally employees until the hiring entity proves otherwise through each prong of the “ABC test.”

Our colleagues in Massachusetts, who have been living with the ABC test since 2004, tell us that the rubber meets the road with the second prong of this test.  It is often a tough call as to whether a worker’s services are in the employer’s “usual business,” particularly for specialized functions such as marketing or human resources that a company may need to run its business, but may or may not be considered essential to its core business.  The Massachusetts Attorney General, in response to questions about this complex standard, issued an Advisory in 2008 to provide clarity to employers, which explained that prong two of the Massachusetts test required considering whether the service the worker is performing is “necessary to the business of the employing unit or merely incidental.” Toward this end, it provided illustrative examples:

  • A motor vehicle appraisal company cannot classify an appraiser as an independent contractor because the appraiser is performing an essential part of the appraisal company’s business.
  • A drywall company cannot classify an individual who is installing drywall as an independent contractor because that worker is performing an essential part of the business.
  • Conversely, an accounting firm hires an individual to move office furniture. That worker may be classified as an independent contractor because moving furniture is incidental and not necessary to the accounting firm’s business.

Back here in California, we predict the easy classifications will remain just that. The retail clothing store that hires an electrician to install new lights at the store clearly hires someone free from the store’s control (free of instructions regarding how to wire lights), outside the usual course of business (selling clothing), and in an independent trade (the electrician presumably works for many customers, at least if the electrician wants to stay in business).

The harder classifications occur around the margins. What exactly is “control” in each circumstance? Telling a painter to apply a specific paint color? And for those independent contractors who have a sole or key or main client - does that threaten the business model that builds a business around a significant or (only) source of business because a single-source of clientele cannot be something that “customarily” reflects an independent trade or business? And in this day and age, the contours of a business aren’t even clear – especially if that business focuses on technology.  Of course, this decision greatly impacts the “gig” economy, whose business model centers around the use of an independent workforce – so much so that we have to wonder whether the government will need to step in to clear a path for these businesses to engage non-employee workers.

Mintz Levin’s employment group, which has extensive experience counseling employers regarding the Massachusetts “ABC test,” as well as California employment expertise, is prepared to assist clients in analyzing its independent contractor classifications. At a minimum, we suggest businesses undertake their own “ABC test” and do the following:

  • Analyze current classifications;
  • Begin a sensible intake process for incoming contractors (determining which individuals at the business have the right or obligation to undertake this review); and
  • Conduct training for personnel regarding appropriate classifications moving forward.

One ABC test clearly deserves an equally sensible and business-like response.

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Jennifer B. Rubin is a Mintz Member who advises clients on employment issues like wage and hour compliance. Her clients range from start-ups to Fortune 50 companies and business executives in the technology, financial services, publishing, professional services, and health care industries.