A new rule in California has tightened the definition of an independent contractor. The “ABC Test” or “ABC Rule” enacted April 2018 modifies the preexisting Borello Test to further restrict the classification of workers as independent contractors.
The Borello Test was adopted from the 1989 California Supreme Court case S.G. Borello & Sons, Inc. v. Dept. of Industrial RelationS.G. Borello & Sons, Inc. v. Dept. of Industrial Relations. The previous test determined if a worker was an independent contractor based on the following 11 questions;
- 1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- 2. Whether or not the work is a part of the regular business of the principal or alleged employer;
- 3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- 4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
- 5. Whether the service rendered requires a special skill;
- 6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
- 7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- 8. The length of time for which the services are to be performed;
- 9. The degree of permanence of the working relationship;
- 10. The method of payment, whether by time or by the job; and
- 11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
The new ABC Test adds three new provisions to the Borello Test;
(a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
(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 that involved in the work performed.
This new test came out of the Dynamex Operations West, Inc v. Superior Court case. The case is a perfect example of what the ABC Test now excludes; workers for the shipping company Dynamex, were classified as independent contractors in complete compliance with the previous test. The workers made deliveries using their own vehicles and paid all their own transportation expenses and insurance. Workers were able to set their own schedules to make deliveries for other companies.
Under the new ABC test, a similar working relationship to this would no longer classify the worker as an independent contractor. This violates part B, which is the most distinct change from the previous test, an independent contractor cannot be performing work for the business that the business regularly engages in. Any work that is part of the normal operations of a business no longer qualifies. The work must be distinctly different, such as a party planner planning a banquet for a technology company.
It is essential to reassess employment relationships in order to be in compliance with this new rule. It will greatly change the workers’ compensation and taxation for many businesses in California.
By: Nicole Eddy, Paralegal Intern