How do I know if an individual is considered an employee or independent contractor in California?
California uses an "ABC" test in most circumstances to determine independent contractor status, which is based on meeting three key factors. California Assembly Bill No. 5 (AB-5), effective as of January 1, 2020, codifies this test which came about from the decision in the Dynamex Operations West, Inc. v. Superior Court of Los Angeles case.
The ABC test requires all three of the following to be met in order for an individual to be classified as an independent contractor:
(A) The person 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.
This is a common standard used by many enforcement agencies and one employers are likely familiar with. A worker who is subject to the same type and degree of control over work performed as employees would likely also be considered an employee.
(B) The person performs work that is outside the usual course of the hiring entity's business.
Simply allowing an individual to set his or her own hours and place of work is not sufficient to justify independent contractor status if the worker's role would "ordinarily be viewed by others as working in the hiring entity's business" rather than the worker's own independent business. The court provided examples such as a plumber or electrician performing repairs in a retail store as unrelated to the store's usual course of business. In contrast, a clothing manufacturer hiring a seamstress to make dresses from home using cloth and patterns provided by the company, or a cake decorator working on custom-designed cakes for a bakery, are clearly part of each company's usual business operations.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Independent contractors will generally be in business for themselves and will perform similar work for different companies using special expertise and/or equipment that the hiring company does not possess. A worker must make the independent decision to be self-employed through incorporation, licensure, advertisements, etc., rather than being labeled as such by a hiring company.
While AB 5 has relatively simple requirements for the ABC test itself, the exceptions to the rule are plentiful and often confusing. On September 4, 2020, AB 2257 was passed, which acts to further clarify those exemptions and was effective immediately. See Calif. Governor Signs Law Exempting Freelance Journalists from 'ABC Test'.
California voters approved Proposition 22 in November 2020, allowing gig-economy companies to classify app-based ride-hailing and delivery drivers as independent contractors if certain criteria are met. On Aug. 20, 2021, a state judge said the law is unconstitutional and unenforceable; however, a state appeals court reinstated the law on Mar. 13, 2023. Further appeals to the California Supreme Court are expected. See California Court Says Drivers Can Be Independent Contractors.
On January 16, 2020, a California U.S. District Court judge issued a preliminary injunction stopping AB 5 from applying to motor carriers operating in California. A federal appeals panel later ruled 2-1 to uphold California's authority to enforce that test against motor carriers. Legal experts expect motor carriers and independent truckers to appeal the decision. See Ruling Threatens Independent Trucker Business Model in California.
In addition, some occupations are not covered under these criteria, such as physician, lawyer, architect, private investigator or accountant. See other excluded occupations in the regulations. The determination of employee or independent contractor status for individuals in those occupations shall be governed by the California Supreme Court's decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989), also referred to as the "economic realities" test. This test looks at multiple factors, including who controls the work, whether workers supply their own tools, how long services are performed, if they require a special skill and whether the hiring business supervises the work. These factors are evaluated in their entirety with no one factor being determinative.
See also, California Department of Industrial Relations: Independent Contractor versus Employee
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