Independent-Contractor Status Is Still a Hot Topic in California

Several years after the "ABC" test was first used in California to distinguish between independent contractors and employees, the controversial law continues to change as it is amended and more exceptions are made.

AB 5 took effect on Jan. 1, 2020, and codified the three-pronged ABC test—which was first adopted by the California Supreme Court in 2018—to determine worker classification. The stringent test renders most workers employees unless their jobs fall under an exception.

Independent-contractor status is "yet another hot topic in California, especially with all the amendments to AB 5 last year," said Mike Letizia, SHRM-SCP, president and CEO of Letizia HR Solutions Inc. of Stockton, Calif., during the California State Council of SHRM's (CalSHRM's) 2021 California State HR Advocacy and Legislative Conference on April 15.

Why is worker classification such a contentious issue? Employees are entitled to minimum wage, overtime pay and other benefits, such as business expense reimbursement in California. So employers that misclassify workers as independent contractors could be on the hook for wages, overtime premiums, meal and rest break penalties, and more. Independent contractors are not entitled to such benefits, but they generally have more flexibility to set their own schedules and work for multiple companies.

AB 5 continues to dominate the news, said Bruce Sarchet, an attorney with Littler in Sacramento, Calif., to virtual conference attendees. Here are some of the key points employers in California should note about the controversial independent-contractor test. 

What Is the ABC Test?

Prior to the ABC test, the Borello test had been applied in California for about 30 years. In 2018, the California Supreme Court discarded the Borello test to determine independent-contractor status and adopted a new ABC test, Sarchet recalled.

The Borello test primarily considered whether the hiring entity or the worker controlled the work. The test also evaluated multiple secondary factors, such as whether workers supply their own tools, how long services are performed and whether the hiring business supervises the work. The factors were evaluated in their entirety with no one factor being determinative.

When the California Supreme Court first adopted the ABC test, the business community argued that the court was inappropriately doing the job of the state legislature by creating a new rule, Sarchet noted. "Be careful what you ask for," he said. The legislature responded by passing AB 5, which codified the ABC test.

Under the ABC test, employers have the burden of showing that all three of the following factors are met for a worker to be properly classified as an independent contractor:

• (A) 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) The worker performs tasks that are outside the usual course of the hiring entity's business.
• (C) The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

Prong B is particularly challenging for businesses to prove. "Defining what is 'the usual course of business' can be quite tricky," Sarchet noted.

Do the Exceptions Swallow the Rule?

The ABC test applies to the California Labor Code, the Unemployment Insurance Code and the Industrial Welfare Commission wage orders, unless another definition of "employee" is provided. 

About 67 job types were carved out of AB 5. Some jobs were excluded from the start, and many freelance journalists, musicians, translators and other workers in California were added to the list of exceptions under an amendment, AB 2257, that Gov. Gavin Newsom signed in September 2020.

Newspaper carriers are exempt from AB 5 until Jan. 1, 2022. "Stay tuned on this one," Sarchet said. "We shall see whether or not newspaper carriers … will have a further exception."

Even if a particular job title or category is listed under the exceptions, hiring entities will need to check the fine print to ensure workers qualify. Furthermore, business leaders should note that workers who do qualify for one of the exemptions aren't automatically independent contractors, Sarchet noted. The Borello test applies to jobs that are not covered by the ABC test.

Another exception, Proposition 22, was approved by California voters in November 2020 and does make certain gig workers independent contractors. The measure allows ride-hailing and food delivery services to continue classifying app-based drivers as independent contractors if drivers can set their own schedules, reject any specific ride, and work for competitors and other businesses. The measure requires covered businesses to provide drivers with certain benefits and develop anti-discrimination and sexual-harassment policies.

Notably, Sarchet said, exceptions to AB 5 do not include independent owner-operator truck drivers, franchisors, and gig-economy workers who are not covered by Proposition 22.

Looking Ahead

There are a number of bills pending before the California Legislature that would make further modifications to AB 5, Sarchet said.

Additionally, California courts will continue to interpret the law. At least four lawsuits filed by employers and trade associations have claimed that AB 5 is unconstitutional. And on the flipside, the state attorney general's office has sued several large businesses claiming that they are misclassifying employees as independent contractors in violation of the law.

"Misclassifying independent contractors remains one of the bigger risks facing California employers," said Walter Stella, an attorney with Cozen O'Connor in San Francisco, to SHRM Online. "A misclassified independent contractor is just an employee by another name."