New California ABC Test for Independent Contractors

Many employers within California rely on what has been a tried and true test to determine whether a person providing “service” or work to their company can be correctly classified as an Independent Contractor.

In the recent California Supreme Court ruling, Dynamex Operations West v. Supreme Court filed 4/30/18, this process has been significantly changed.

With this ruling, the California Supreme Court established that a test known as the “ABC Test” will be used to make the determination of whether or not any individual WILL be classified as an employee, or the person may be classified as an Independent Contractor.

The ABC test is a three prong analysis of the duties and controls that are in place with any individual person performing work for a company. In order for a company to correctly classify a worker as an Independent Contractor, they must be able to prove that each and all of the following three factors apply:

  • The worker is performing the work in a manner that is free from the control and direction of the “hiring company” in connection with the work that is performed. This must is true under both the contract as well as the actual facts of the work performed by the person; AND
  • The person performs work which is outside of the usual course of the “hiring” company’s line of business; (otherwise known as the “production work” that the company is in business to do), AND
  • The person performing the work is customarily engage in an independently established trade, occupation or business of the same nature as the work that is being performed.

To correctly meet the test for an Independent Contractor status ALL THREE of the factors must be met.

This ruling significantly changes the manner in which a business may classify those who perform services that benefit the company. Additionally, this new ruling brings new challenges to companies to ensure that all persons performing work are treated correctly, and that all provision of the California Wage Orders are provided to workers who do not meet this ABC test.

The determination of the classification of either employee or independent contractor has historically been a matter of preference by either the company receiving the services, or by strong preference by the individual performing the services. This has been true across a large cross section of the types of work being performed, such as, but not limited to many of the following:

Hair Stylist in a salon                     Massage Therapists                        Delivery Drivers

Accountants                                     IT Individuals                                    Risk Management Person

Office Assistants                              Marketing                                         Outside Sales

Human Resources                           Appraisers                                         Maintenance and Repair

“GIG” industries workers

The challenge with making the correct determination will be in the details of the work performed. It will also be tied to the analysis of the business that any company is “in business” to do, or to provide in the marketplace.

If the work that is being performed is being done to facilitate the creation or production of what it is the company is in business to provide in the marketplace, the likelihood is strong that the person providing that work should be correctly classified as an employee.

If instead the work being performed is ancillary to the business production, such as an electrician who fixes a wiring problem, or a company that hauls trash on occasion to the dump, and both of these individuals are in business to do these services for other companies, the classification of independent contractor is more likely to be correctly applied to the worker.

If a company feels that an individual providing services meets ALL THREE of the factors above, it is recommended that the company engaging the services has documentation on file of the analysis of all three factors, and has the following documents on file as well:

Copy of the business license for the individual performing the work, or for the company employing the worker doing the   work;

        Copy of the individual’s or the company’s business insurance policy;

In the case of a worker employed by another company, a copy of that company’s workers compensation insurance policy covering that worker;

Any indicia available that shows that the individual or company holds themselves as being in business to provide the same services in the open marketplace.

The implications of an incorrect classification as an Independent Contractor are significant. If challenged by the worker, or by the California Department of Labor Standards, and the result is an incorrect classification as an employee, the company engaging the services will need to be able to provide all the standard requirements that would be in place for an employee.

Examples of the documentation that would required could be, all work time records showing the time the employee begins work, starting and ending times for  the required meal periods (if required) and the end time of each shift worked.

In addition, the company engaging the services must be able to show proof that the employee was covered by the engaging company’s workers compensation insurance plan (that the hours and associated wages were reported to the insurance carrier), as well as pay for all overtime, meal periods, and if required by law, insurance such as medical insurance coverage is in place for the worker.

Once a determination is made that the worker is in fact to be classified as an employee, the employing company becomes responsible for all taxes that should have been applied (or deducted) to compensation given to the worker, to include social security, medicare, (both the worker contribution and the employer match), state unemployment insurance, State and Federal income tax withholding, State disability insurance (SDI).

It is also important to understand that many of the requirements mentioned in the paragraph above have one or more penalties associated with a company’s failure to comply with the various laws, and that many of these penalties stack on top of one another, which can cause the damages for mis-classification to sky rocket.

Allardyce Resources LLC is available to assist Clients to review job classifications and to assist them in making the correct classification for workers.

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