New “ABC Test” for CA Independent Contractors

On April 30, 2018, the Supreme Court of California issued an opinion dictating what legal standard will be applied when determining the relationship between a worker and an employer. The court adopted a test called the “ABC” test, which determines whether a worker is an employee or an independent contractor. When a worker is an employee, employers are subject to federal Social Security and payroll taxes, unemployment insurance taxes, state employment taxes, workers compensation insurance, and state and federal regulations controlling wages, hours, and work conditions. Employees also gain certain protections under applicable labor laws. When a worker is an independent contractor, the employer is free from such obligations and the worker is not protected by the same labor laws. Thus, it is critical to properly evaluate the relationship between workers and employers.

The “ABC” test sets out a three-pronged test where all three of the prongs must be met in order for a worker to be classified as an independent contractor. Prong (A) states that the worker must be free from the control and direction of the employer in connection with the performance of the work involved. This means that employers who set hours, have direct oversight over the working process, supply materials, or set controlling terms in the employment agreement establish an employee relationship with the worker.

Prong (B) states that the worker must perform work that is outside the usual course of the hiring entity’s business. This prong can be satisfied by showing that the work performed by the workers would not otherwise be done by the employer without the employment of the worker. Incidental work such as window washing and lawn mowing is generally outside of the usual course of the employer’s business, unless that employer operates a window washing or lawn mowing business.

Prong (C) states that the worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. This can be evidenced by showing that the worker has taken steps to be independent from the employer, such as independent incorporation or performing services for other entities. However, this is not determinative. If it can be shown that the worker substantially relies on work from the employer, it may be reasoned that the worker is not independently established.

Two major cases from Vermont and New Jersey have shown what a relationship that passes the “ABC” test looks like.

In Great North Construction, Inc. v. Department of Labor,[1] one construction worker, Mr. O’Connor, was found to have an independent contractor relationship with Great North Construction. He was found to have passed prong (A) because he had no formal contract dictating his relationship with his employer, set his own schedule, worked without supervision, and was free to accept or decline work from his employer at his own will. He also purchased materials through his own company’s credit card and used his own personal equipment to work on construction jobs. He passed prong (B) because, although his employer operated a construction business, the type of construction that he was doing was highly specialized, and his employer did not provide those services except through him. Although the court did not inquire into prong (C), it is likely that he would have passed this prong as well, as he was independently incorporated and had received other job offers from other employers. Even though the bulk of his work was for one employer, he would still have been able to sustain the business through the other potential employers.

In Carpet Remnant Warehouse, Inc. v. New Jersey Department of Labor,[2] two carpet installers were found to have an independent contractor relationship with Carpet Remnant Warehouse. They passed prong (A) because they were not subject to dismissal for failure to meet certain work standards or for failure to follow the employer’s recommended methods of performance. They passed the (B) prong under a different type of analysis. The New Jersey court looked to see where the geographical location of the work was being done. If the work was being done at the employer’s headquarters or at a place where the employer conducted an integral part of their business, an employee relationship would be found. However, because the carpet installers were doing their work at customers’ homes and not in any store or headquarters owned by their employer, they were found to have passed the prong (B) standard. They were found to have passed prong (C) because they would have been able to continue their existence apart from their relationship with Carpet Remnant Warehouse.

Although the “ABC” test can be powerful, it is not without its limitations. The California Court of Appeals clarified that the policy reasons behind adopting the test can also work against its application when the underlying policy is not being advanced. Because the application of the rule is limited, certain unique employment arrangements may prevent this test from being applied. One such arrangement is in the case of joint employment.[3]

By properly examining the employer-worker relationship under the “ABC” test, employers may be able to better understand what requirements they must meet in relation to each worker that they are involved with. This test can help employers to better comply with both federal and state laws and regulations and avoid costly penalties. Employers must pay special attention to each and every employment arrangement, so that they can properly determine whether they can be subjected to the “ABC” test. Should a joint employment relationship exist, employers may want to investigate the classification of the worker by the other employer before classifying them as an independent contractor. Each relationship must be carefully examined on a case-by-case basis, and employers should give special attention to ensure that either all three prongs can be met or that a joint employment relationship exists before classifying workers as independent contractors.

If you need assistance regarding the adopted standard for independent contractors in California, please call for an appointment with one of our experienced labor law attorneys.

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[1] Great North Construction, Inc. v. Department of Labor, 2016 VT 126 (2016).

[2] Carpet Remnant Warehouse, Inc. v. New Jersey Department of Labor, 125 N.J. 567 (1991).

[3] Curry v. Equilon Enterprises, LLC, _ Cal.App.4th __, (2018, 4th Dist. E065764).