California releases ABC test exception guidance

The California Employment Development Department (EDD) has issued a new publication addressing the ABC test exemption for contracts for professional services.

The Details: 

As of Jan. 1, 2020, the California Unemployment Insurance Code (CUIC) was amended to apply a new standard for classifying workers as employees. Under this new standard known as the ABC test, an individual providing labor or services for wages is presumed to be an employee rather than an independent contractor, unless the employer can demonstrate that the following three conditions of the ABC test are met:

1. 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;
2. The worker performs work that is outside the usual course of the hiring entity's business; and
   
   
3. 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.

However, there are certain situations where employers may apply a less strict test, known as the Borello test, instead of the ABC test for worker classification purposes. 

In order to apply the Borello test, the following criteria that must be satisfied:

(1) the individual is performing one of the specific professional services identified in Cal. Lab. Cd. §2778(b)(2);

(2) the services performed meet industry-specific requirements, if any are stated;

(3) the six specific factors in Cal. Lab. Cd. §2778(b)(2) are all met. 

If any requirement is not satisfied, employers must use the ABC test to determine whether the worker should be classified as an employee or independent contractor.

The State of California’s Employment Development Department has issued, Publication DE 231PF,  which provides information on the professional services that an individual must perform in certain occupations in order to qualify for the ABC Test exception. The profession services include marketing, travel agent, graphic designer, appraiser and licensed manicurist, among others. The Publication also provides industry-specific requirements for each type of professional service.

Publication DE 231PF also sets forth the six specific factors that must be met in order to use the Borello Test rather than the ABC test  to determine whether the worker is an employee or an independent contractor.  These factors include where the individual:

1.    Maintains a business location that is separate from the hiring entity;

2.    Has the required business license or tax registration to provide the services under the contract;

3.    Can set or negotiate their own rates;

4.    Can set their own hours;

5.    Is customarily engaged in the same type of work with another hiring entity or holds themselves out to potential customers as available to perform the same type of work; and

6.    Customarily and regularly exercises independent judgment and discretion when performing services.

Next steps:

Employers should review Publication DE 231PF to determine whether a worker is an employee or independent contractor and whether the Borello Test rather than the ABC Test may be used to make such determination.   

Have questions?

Please contact your dedicated service professional with any questions.