May 2022

State Updates

 

California expands use of ABC test for independent contractors

10/03/19

Author: ADP Admin/Saturday, September 28, 2019/Categories: Compliance Corner , State Compliance Update, California

California has enacted legislation (Assembly Bill 5) that will broaden the applicability of the ABC test for determining whether a worker is an independent contractor or an employee. Assembly Bill 5 takes effect Jan. 1, 2020

Background:

In 2018, the California Supreme Court ruled (see Dynamex Operations West, Inc. v. Superior Court) that the ABC test should be used to determine whether a worker is an independent contractor or an employee for purposes of coverage under the state's Wage Orders. The Wage Orders address minimum wage, overtime, meal and rest breaks, and related issues across various industries and cover employees, but not bona fide independent contractors.

Under the ABC test, a worker must be considered an employee unless all three of the following factors are met:

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; 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.

Assembly Bill 5:

Assembly Bill 5 codifies the Dynamex decision and makes clear that the ABC test also applies to the provisions of the Labor Code and Unemployment Insurance. Thus, if the worker fails to meet the ABC test, the employer must treat them as an employee who is covered by not only the Wage Orders but also the Labor Code and Unemployment Insurance.  For example, workers who fail to meet the test may be eligible for workers’ compensation, paid sick leave, paid family leave, school activities leave, unemployment benefits, and disability benefits.

Exceptions:

The ABC test will not apply to several occupations, including:

  • Licensed insurance agents;
  • Real estate licensees;
  • Barbers and cosmetologists;
  • Registered securities broker-dealers or investment advisers;
  • Direct sales salespeople;
  • Commercial fishermen;
  • Physicians and surgeons, dentists, podiatrists, psychologists, or veterinarians licensed by California;
  • An individual who holds an active license from the state and is practicing one of the following recognized professions: lawyer, architect, engineer, private investigator, or accountant.

See the text of the law for a full list of exempt occupations. 

The exempt occupations will generally be subject to a multifactor independent contractor test under which no single factor is determinative and the unique circumstances of each case are weighed and balanced. This is known as the Borello test.

Compliance Recommendations:

For purposes of determining whether a worker is covered under the state's Wage Orders, Labor Code, and Unemployment Insurance, California employers should apply the ABC test unless the occupation is exempt under Assembly Bill 5. If the worker fails to satisfy one or more parts of the ABC test, they must be treated as an employee. Employers who work with independent contractors may want to consult legal counsel to review those classifications and reclassify workers as necessary.

Please contact your dedicated service professional with any questions.

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Tags: 10/03/19

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