United States: New "ABC Test" Sends California Employers Reeling

Applying the Standard for Independent Contractors

California has adopted a new ABC test for determining whether a worker should be classified as an employee or an independent contractor. This new multifactor test has sent shockwaves across employers statewide, and its tricky application has some reeling. Between the new test and questions about retroactivity and joint employer applications, employers should use caution and evaluate their independent contractor relationships.

The "ABC test" recently adopted by the California Supreme Court in the Dynamex Operations West, Inc. v. Superior Court case is now touted as the best way to make the distinction between an "exploited employee" and an "entrepreneur." The court's adoption of the ABC test for determining whether an employee should be classified as an employee or independent contractor has sent shock waves to businesses that have relied in the past upon a flexible, multifactor common law test where none of the individual factors, taken alone, are necessarily controlling.

The ABC Test

A hiring entity classifying an individual as an independent contractor now bears the burden of establishing that such a classification is proper under the "ABC test." To do so, the entity 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) 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.

More than 20 states already appear to use some form of the ABC test, although for most of them, the test has been used for only a particular inquiry, such as unemployment insurance determinations. In California, however, the state Supreme Court specifically ruled that the ABC test should be broadly applied for inquiries under the California Wage Orders as to whether a worker is an employee or independent contractor.

Because the Wage Orders regulate the terms and conditions of employees in all industries and occupations, the new test will have far-reaching consequences. Some areas of the law remain unsettled, such as whether the ABC test should be applied to Labor Code claims not arising under a Wage Order (for example, claims for expense reimbursement under Section 2802) or to what extent state or local federal courts could find that an element of the test is pre-empted by federal law.

Applying The ABC Test

Many businesses have service workers who request to be paid as 1099 independent contractors. These include workers across a broad spectrum of occupations and industries, such as truck drivers, exotic dancers, contract accountants, IT workers and even high-level managers with special skills. Among their most common reasons: avoiding income taxes or other tax relief benefits. But a worker's request to be reclassified, standing alone, won't turn the scales in an employer's favor.

In Dynamex, the court maintained that the public interest in social welfare does not always jibe with the personal interests of workers and that, in the end, the intent of public policy in protecting workers is a central consideration in determining employee versus independent contractor status. The consequences of misclassification continue to raise complicated issues when multiple entities are involved, including joint liability upon a finding of joint employment.

Another problem made worse by the Dynamex case arises from the growing number of workers in the "gig economy," which depends on the use of independent contractors as a business model. Companies are now being forced to rethink whether their particular model at the heart of their business runs afoul of the ABC test and could result in misclassification liability.

In the end, businesses should think not only about their own company's potential liability, but the potential liability of affiliated companies benefitting jointly from the services performed. Given that the risk of misclassification presumably could be greater in such situations, vendors and business affiliates similarly should be concerned about these risks. They could impact contractual relationships including the attempt, noted by Dynamex, to spread the risks by various means, such as indemnification agreements.

PRONG A – "Free from the control and direction of the hiring entity"

Due to the prevalence of decisions examining "control" under the old test, it is foreseeable that many businesses will suffer losses due to misclassification under factor A of the ABC test. The fact that some workers request, or require, a 1099 arrangement generally will not help much if the other facts don't support independent contractor status. And one issue impacting this factor is whether the worker treated as an independent contractor was also the same individual doing the work when classified as an employee, which the Dynamex court cautioned is an example of where control is implicit.

PRONG B – "Performs work that is outside the usual course of the hiring entity's business"

Many employers in California using independent contractors have been confronted with the reality that, given the ABC test — particularly Prong B — their business model is in trouble. The California Supreme Court reasoned that services that would ordinarily be viewed by others as falling within the hiring entity's business rather than a worker's "own independent business" render that worker an employee and not a contractor.

The examples provided by the court where a worker would satisfy this prong and be properly classified as a contractor were relatively clear-cut: a retail store retaining a plumber or electrician to perform maintenance work at the facility, not a service normally provided by the retailer. As for specialized technical work within an isolated function of an employer's business, the court said these are not among the types of jobs that would typically qualify, even though these have historically fallen within a gray area. This prong of the test could create differing opinions among courts attempting to interpret the new law.

Because the Federal Aviation Administration Authorization Act (FAAAA) pre-empts state laws that relate "to a price, route or service" of a motor carrier, at least in the transportation industry, employers may argue that the FAAAA pre-empts an overbroad application of the "B" prong. So far, however, California courts have not ruled in favor of pre-emption when this element was part of the larger list of factors subject to discretionary weighing. On the other hand, the First Circuit Court of Appeals, addressing Massachusetts' ABC test, has found pre-emption of the B factor on different facts, so there may be some hope on the horizon for some employers.

PRONG C – "Independently established trade, occupation or business"

Under the third prong, businesses will be required to prove that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work they are performing for the hiring entity. The court again referred to such workers as plumbers and electricians retained for limited functions or projects as those traditionally fitting into this prong. On the other hand, workers engaged to carry out a skilled function that falls under a particular integrated part of a business — as opposed to someone in a separate trade, occupation or business retained for doing a separate service outside the scope of the business employment context — may nonetheless be prone to be viewed as employees no matter how skilled the work involved.

For the above reasons, organizations with independent contractors will need to examine these factors as they relate to their business. There is good reason to be very careful with regard to engaging any independent contractors going forward, especially workers who are working as single individuals ("one-person company"), rather than companies who have retained a force of workers employed by an independent business.

Does Dynamex Have Retroactive Application?

There is yet another reason for concern by employers: the issue of whether the Dynamex decision applies retroactively. This issue could mean the difference between catastrophic liability and merely a correction going forward, as needed.

Businesses maintain that the new mandatory test adopted by the Dynamex decision should not apply to employers retroactively because it would violate due process. After all, businesses relied upon the older tests that balanced multiple elements for years, establishing their business model in reliance upon the more flexible factors. On the other hand, employee advocates contend that the decision merely clarified existing law and therefore should apply retroactively. This issue is currently before the California Supreme Court, and hopefully we should soon have an answer to this question.

Does Dynamex Apply To Joint Employment Scenarios?

There is some good news, however, in recent appellate court decisions addressing Dynamex. One California appellate court has already limited the scope 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. Instead, the court ruled that it only applies when determining whether an individual has been correctly classified as an independent contractor. 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 all is said and done.

Conclusion

Regardless of the outcome on the retroactivity and joint employment questions, businesses would be wise to carefully evaluate their independent contractor relationships with their legal counsel in California to avoid liability going forward, as there are bound to be further legal decisions clarifying the application and scope of the ABC test.

Originally published by Corporate Compliance Insights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions