The California Supreme Court has changed the standard used to evaluate whether workers should be classed as contractors or employees in a landmark ruling. The new “ABC” criteria states that a person is only regarded an independent contractor if the employing organisation can demonstrate all three of the following:
(A) The worker is not subject to the kind and degree of control and direction that the employing organisation ordinarily employs over its workers; and
(B) The worker conducts work outside the scope of the hiring entity’s business, and as a result, his or her employment is not normally seen as working in the hiring entity’s company by others; and
(C) The worker is normally engaged in an independently formed trade, occupation, or business, taking procedures such as incorporation, obtaining a company or trade licence, or advertising.
Importantly, just demonstrating that a hiring company does not restrict or impede a worker from operating in such an independent business does not satisfy part C of the test. Rather, the court emphasised the “independent” in “independent contractor,” specifically stating that in order for a worker to be classified as a contractor, the worker must have made an independent decision to strike out on their own and start a business, and the hiring entity must be able to prove it.
Although the court provided little guidance on how these factors will be interpreted and applied, it did provide examples of workers who would be properly classified as contractors (an outside plumber who repairs a leak in a retail store’s bathroom) and those who would be incorrectly classified as contractors (a work-at-home-seamstress who makes dresses from clothes and patterns supplied by a company that intends on selling the dresses).
The court noted rulings from other states that have previously adopted the ABC test, such as Massachusetts and Virginia, and these examples may be useful in establishing how California would eventually interpret these considerations.
The use of the ABC test is being litigated to determine if it will be retroactive.
California emphasised the significance of ensuring individuals are protected by California’s wage and hour regulations, including access to overtime pay and meal and rest breaks, in adopting this new test. The court also found that misclassifying employees as independent contractors has cost federal and local governments billions of dollars.
The introduction of the ABC test is expected to have an impact on businesses situated in California and/or that use contractors in California. Individuals resident in California, including consultants, advisers, and “gig economy” employees, may be impacted by this judgement as well.