Are your independent contractors classified correctly?

Written by: Rebecca Gomez

CA Supreme Court Adopts a New Tougher Standard

For the past several decades, California courts utilized the multi-factor test to determine whether or not a worker is classified as an employee or independent contractor. The multi-factor test focused on the level of control the employer retained over the worker and other factors, such as the right of employer to discharge individual, how the individual is paid, length of services, and the parties’ intent.  

Last month, the California Supreme Court abandoned the multi-factor test and adopted the “ABC Test.” The “ABC Test” imposes a tougher legal standard to determine whether or not an individual is truly an independent contractor. The legal effect for this ruling places the burden on the employer to establish that a worker is not an employee by proving that the worker performs work that is “outside the usual course” of the employer’s business.

Under the “ABC Test,” an employee, generally, would be viewed by others as working in the hiring entity’s business and not for the worker’s own independent purposes. The Court explained, the term “employee” for the purpose of wage orders does NOT include workers who provide only occasional services unrelated to an organization’s primary line of business and who have their own independent business.

The ABC Test

Under the “ABC Test” a worker is presumed to be an employee, unless:

A. The individual is free from control and direction of the hiring entity (both by contract and in fact)

• The individual must be free from control. If an employer dictates how or where the work gets done, or who does the work–the individual is an employee.
• Although an employer may put a “when” on work by establishing a deadline, they should not dictate work be done on certain days or certain hours.

B. The individual performs work that is outside the usual course of the hiring entity’s business;

• The work individual performs must not be essential to the offerings of the business.
  • Cooks and servers for restaurants perform work that are essential to the business and therefore are employees, not independent contractors.
  •  Someone who is hired to design a new menu or reupholster their booths do not perform work essential to the restaurant business, therefore can be classified as independent contractors.

C. Individual engages in an independently established trade, occupation, or business.

• Is the worker in business for themselves doing the kind of work that the organization has hired them?
• The focus of this element is whether the individual made money from other sources, besides the employer, doing the same kind of work they offered to the employer.
  • The more evidence indicating the individual has an established business, the stronger the argument for an independent contractor

All three parts must be satisfied in order to properly classify an individual as an independent contractor. If the employer cannot establish any one factor, the individual is an employee for wage purposes.

Below are some examples of True Independent Contractors:

• Independent Plumbers
• Independent Electricians
• Independent Accountants
• Sole Practitioner Attorneys

What should your organization do?

Since the new standard is case law, coming from the court not legislature, the standard takes effect immediately. Your organization should mitigate your liability, with assistance from your attorney, by analyzing the individuals currently classified as independent contractors and apply the ABC Test. If the individual fails one or more of the factors, reclassify them as an employee. Work with your attorney to assist with implementing the classification transition and help minimize potential legal exposure.

Insurance Policies generally do not cover independent contractors. It is best practice to request your independent contractors to provide you with a certificate of insurance and adding your organization as an additional insured. To help mitigate gaps in insurance coverage, your attorney should review your insurance policies.

Let us know if you have any questions or would like us to provide you with an insurance quote. We are here to help. 

This article is intended for informational purposes only and not to be construed as legal advice.