California - Are Your Independent Contractors Really Employees?

Date: October 16, 2019
If you use workers in California and classify them as independent contractors, you should review new California law AB-5 (AB-5) to determine whether these individuals must be treated as employees beginning January 1, 2020. 

AB-5 is a new law that will require many workers in California currently classified as independent contractors to be reclassified as employees.  Although the new law was primarily designed to cover app-based employers such as Uber and Lyft, the new law will impact any business that hires workers in California, even if the business does not have an office there.  The new law is more strict than the current federal guidelines used to determine whether a worker can legitimately be classified as an independent contractor.  For federal employment tax purposes, common law rules require a business to consider the degree of control and independence between a business and a worker by examining three categories—Behavioral Control, Financial Control and the Relationship of the Parties.  AB-5 presumes that a worker is an employee, unless the business can satisfy all three prongs of an “ABC” test. 

AB-5 codifies the ABC test established by the California Supreme Court in its 2018 decision in Dynamex Operations West.  The Court in Dynamex classified all workers as employees, with a few exceptions, thus entitling them to minimum wage and overtime pay, workers’ compensation if they are injured while on the job, paid sick leave, paid family leave, and all other benefits afforded employees, unless the hiring entity passes the ABC test.  The California legislature noted the Dynamex Court’s consideration of the lack of significant workplace protections for independent contractors, the unfairness to employers who compete with companies that misclassify employees as independent contractors, and the loss of state revenue derived from workers’ compensation premiums, Social Security, unemployment, and disability insurance assessed against employees.

The ABC test requires a worker to be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all three of the following conditions are satisfied:

(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.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(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.

The law specifically exempts certain professions such as lawyers, architects, engineers and accountants, who hold active licenses in the State of California, and certain medical professionals.

Please note that language in a contract between the business and the individual is not controlling.  If the person is an employee under the AB-5, he or she will be an employee under California law, notwithstanding that the contract between the business and the individual identifies the person as an “independent contractor.”