The End of an Era: The “ABC Test” For Independent Contractors

The End of an Era: The “ABC Test” For Independent Contractors

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classifying an independent contractor

The “ABC test” ratified by the California Supreme Court in the Dynamex Operations West, Inc. v. Superior Court case is now recommended as the leading way to make the differentiation between an “employee” and an “entrepreneur.”

The court’s adoption of the ABC test is designed for determining whether an employee should be classified as an employee or independent contractor. This circumstance places the burden on the business, not the worker, to prove that any particular worker is properly classified as an independent contractor. This in effect, has sent California employers reeling; gaining the responsibility as the hiring entity to classify the worker under the “ABC test.”

Can Your Business Pass the ABC Test?

A hiring entity classifying an individual as an independent contractor must prove each of the following three factors:

(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)  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.

20+ states already use some form of the ABC test, however, for most of them the test has been used for only a particular inquiry such as unemployment insurance determinations.

In California, the state Supreme Court ruled that the ABC test should be widely applied for inquiries under the California Wage Orders as to whether a worker is considered an employee or independent contractor.

The Wage Orders regulate the conditions of employees across various industries and occupations. Some areas of the law remain uncertain, such as whether the ABC test should be applied to Labor Code or to what extent the state or local federal courts could find that an aspect of the test is assumed by federal law.

To Who Does the ABC Test Apply?

Businesses who have service workers who request to be paid as 1099 independent contractors need to evaluate the terms of the new law and classify workers. These include workers from different occupations and industries, such as truck drivers, graphic designers, seamstresses, contract accountants, IT workers, and even high-level managers. Among their most common reasons; avoiding income taxes or other tax relief benefits. However, a worker’s request to be reclassified, won’t necessarily work in the employer’s favor.

Is Dynamex Retroactive?  

Another reason employers should be concerned: the issue of whether the Dynamex decision applies retroactively. This issue could mean the difference between holding liability or merely a correction, as needed.

Businesses stand firmly against that the new mandatory test adopted by the Dynamex decision. Their reasoning maintains that it should not apply to employers retroactively because it would violate the due process. After all, businesses and their model have been established upon more flexible employee hours and factors for years.

In contrast, employee advocates believe that the decision only gave clout to existing law and therefore should apply retroactively.

Will Dynamex Apply to Joint Employment Scenarios?

The silver lining: one California court has already limited the reach of the ABC test, ruling that the test does not apply when determining whether two businesses are joint employers of an individual already treated as an employee. The court ruled that it only applies when determining whether an individual has been correctly classified as an independent contractor or freelancer.

A word of caution, however: the May 18 decision in Curry v. Equilon Enterprises, LLC comes from a state appellate court, not the state Supreme Court, so there may be further court rulings on this topic before concluding.

California businesses should carefully evaluate their independent contractor relationships with legal counsel to avoid liability going forward, as there are sure to be further legal implications clarifying the application and scope of the ABC test.

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