California clarifies, expands exceptions to ABC test for independent contractors

California has enacted legislation (Assembly Bill 2257) that clarifies and broadens the exceptions to the ABC test for determining whether a worker is an independent contractor or an employee. Assembly Bill 2257 takes effect immediately.

Background:

Dynamex Decision:

In 2018, the California Supreme Court ruled (see Dynamex Operations West, Inc. v. Superior Court) that the ABC test should be used to determine whether a worker is an independent contractor or an employee for purposes of coverage under the state's Wage Orders. The Wage Orders address minimum wage, overtime, meal and rest breaks, and related issues across various industries and cover employees, but not bona fide independent contractors.

ABC Test:

Under the ABC test, a worker must be considered an employee unless all three of the following factors are met:

1. 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 such work and in fact;
2. The worker performs work that is outside the usual course of the hiring entity's business; and
3. 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.

Assembly Bill 5:

Effective January 1, 2020, Assembly Bill 5 codified the Dynamex decision and made clear that the ABC test also applies to the provisions of the Labor Code and Unemployment Insurance. Thus, if the worker fails to meet the ABC test, the employer must treat them as an employee who is covered by not only the Wage Orders but also the Labor Code (e.g., paid sick leave, paid family leave, workers' compensation) and Unemployment Insurance.

Assembly Bill 5 included several types of business relationships and occupations that are exempt from the ABC test, including business-to-business, referral agency, and professional services businesses. The exempt business relationships and occupations are generally subject to a multifactor independent contractor test under which no single factor is determinative and the unique circumstances of each case are weighed and balanced. This is known as the Borello test.

Assembly Bill 2257:

Effective immediately, Assembly Bill 2257 amends and clarifies the business-to-business, referral agency, and professional services exemptions from the ABC test. It also adds occupations to the list of those that qualify for exemption, including:

• Certain occupations in connection with creating, marketing, promoting, or distributing sound recordings or musical compositions.
• A musician or musical group for the purpose of a single-engagement live performance event, unless certain conditions apply.
• An individual performance artist presenting material that is their original work and creative in character and the result of which depends primarily on the individual's invention, imagination, or talent, if certain conditions are satisfied.
• Individuals who provide underwriting inspections, premium audits, risk management, or loss control work are added to the exemption for occupations in connection with the insurance industry.
• Home inspectors are added to the exemption for specified occupations governed by the Business and Professions Code.
• Individual performance artists, manufactured housing salespersons, competition judges, and individuals engaged in international exchange visitor programs.

Certain conditions may need to be met for these business relationships and occupations to qualify for the exemption. See the text of the law for details and a full list of exemptions.

Compliance Recommendations:

For purposes of determining whether a worker is covered under the state's Wage Orders, Labor Code, and Unemployment Insurance, California employers should apply the ABC test unless the occupation or business relationship is exempt, in which case a multifactor test may be required. If the worker fails to satisfy one or more parts of the ABC test, they must be treated as an employee. Employers who work with independent contractors may want to consult legal counsel to review those classifications. Please contact your dedicated service professional with any questions.