New Test for Independent Contractors in California

The ABC Test for Independent Contractors

At the end of April, the California Supreme Court issued its long-awaited opinion in Dynamex Operations West, Inc. v. Superior Court, clarifying the standard for determining whether workers in California should be classified as employees or as independent contractors. The Court held that there is a presumption that individuals are employees, and that an entity classifying an individual as an independent contractor bears the burden of establishing that such a classification is proper under the “ABC test.”

When classifying an individual as an independent contractor the employer must establish each of the following three factors, commonly known as the “ABC test”:

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; and

B.  that the worker performs work that is outside the usual course of the hiring entity’s business; and

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

Failure to establish all the above three factors results in a determination that a worker is an employee and thus not an independent contractor.

In other jurisdictions that have been using the ABC test already, most have agreed that proving “B” is the most difficult. 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. 

One interpretation used in other states such as Massachusetts is to consider whether the service the worker is performing is “necessary to the business of the employing unit or merely incidental.” Here are some 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.

Application of the ABC test may make it more difficult to classify workers as independent contractors rather than as employees and may make it more difficult for companies to defend that classification.

Companies that utilize independent contractors should immediately consider whether those workers are properly classified under the ABC test.

Lauren Sims is the article’s author and the Director of Human Resources.

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