AB 5 Independent Contractor Classification: When To Use The ABC Test

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For a worker to be properly classified as an independent contractor (aka “1099 contractor” or “1099 employee”), they must pass certain tests under federal and state law. Following the California Supreme Court’s Dynamex Ops. W Inc. v. Superior Court ruling, California employers have been subject to the “ABC test” since April of 2018. However, effective January 1, 2020, the ABC test is now part of California’s statutes as well.

The primary difference between the law made by the Supreme Court ruling and the law as of January 1 is that the new statute includes certain types of workers that will not be subject to the ABC test, but instead the less strict Borello test. Here’s what you need to know about Independent Contractor classifications in light of AB 5.

Independent Contractor Classification: The ABC Test

Following the Dynamex Ops. W Inc. v. Superior Court case in 2018, in order to properly classify a worker as an independent contractor, employers had to be able to say “yes, this is true” to all three parts of what is called “The ABC Test.” These parts included:

  • A. The worker is free from the control and direction of the hirer in connection with the performance of the work. (Both under the contract for the performance of such work and in fact.)
  • B. The worker performs work that is outside the usual course of the hiring entity’s business.
  • 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.
A: Free From Control

Every state and federal test currently in use for independent contractors looks at control. Most, however, ask about degree of control. Conversely, the ABC test is much more definitive. It demands that the worker be free from control. If an employer dictates how or where the work gets done or who does it, they have an employee.

Likewise, although an employer may put a “when” on work by establishing deadlines, they should not dictate that the work be done on certain days or during certain hours.

B: Outside Usual Course of Business

Next, an independent contractor must be doing work that is outside the employer’s usual course of business. (That is, not essential to the offerings of the business.)

To illustrate, in a restaurant, the cooks and servers do work that is in the usual course of business. However, someone hired to design the new menu or reupholster the booths does not. The cooks and servers must always be employees, while those who do work that is not part of the business’s core offering would pass this requirement of the test.

C: Worker Has An Established Business

Finally, the ABC Test asks whether the worker is in business for themselves doing the kind of work that they are doing for the organization that has hired them. For instance, does the individual hired to design the new menu offer their graphic design skills on the open market? Do they have other paying customers, a business card, website, etc.?

The focus will likely be more on whether the individual made money from other sources doing the same kind of work they offered to the employer and less on whether they had the standard business accessories. That said, the more evidence of an established business, the stronger the argument for an independent contractor.

Independent Contractor ABC Test Webinar Thread

ABC Test Exemptions

Initially, it appeared that the ABC Test would apply to all workers. However, in September 2019, California Assembly Bill (AB) 5 passed establishing exemptions. Workers exempt from the ABC test are instead subject to the previous Borello test and include:

  • Licensed insurance agents
  • Doctors (licensed physicians and surgeons, dentists, podiatrists, psychologists, and veterinarians providing services to or by a health care entity)
  • Licensed lawyers, architects, engineers, private investigators, and accountants
  • Registered securities broker-dealers or investment advisers
  • Direct salespeople who are exempt from unemployment insurance
  • Real estate licensees (may be subject to tests other than Borello)
  • Commercial fishermen
  • Certain providers of professional services
  • Others performing work pursuant to a subcontract in the construction industry if certain criteria are met

What do you think?

What has been your experience classifying Independent Contractors since the 2018 Dynamex ruling? Do you fall into the ABC Test classification category, or are your workers exempt and able to use the Borello test instead? Check out our follow-up article for how to implement the Borello test in your Independent Contractor classifications.

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