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On November 20th, the California Supreme Court agreed to take on a question that will be important to employers that have relied (or are relying) on the services of independent contractors in California prior to April 30, 2018. Specifically, the Supreme Court is tackling whether the “ABC Test” should apply to independent contractor relationships before the date it was adopted in the Dynamex decision (April 30, 2018) for purposes of California Wage Orders. The answer to this question will determine whether employers are subject to retroactive exposure for wage and hour claims for classifications made prior to Dynamex.  

What is the “ABC Test”?  

The ABC Test lays out a stricter standard for determining whether an individual is legally considered an “independent contractor” rather than an “employee” of a business. Employee status comes with additional rights and benefits for workers. Under the ABC test, an individual providing services for renumeration is presumed to be an employee, unless the hiring entity (i.e. the employer) is able to demonstrate the individual meets the following standards: 

  • They are free from the employer’s control and direction; 
  • They perform work that is not central (outside the usual course) to the employer’s business; and 
  • They are engaged in an independently established trade, occupation, or business that performs the same nature of services provided to the employer. 

The ABC Test Applies Beyond Wage Orders effective January 1, 2020 

On September 18, 2019, Governor Gavin Newsom signed Assembly Bill (AB 5) into law codifying the ABC Test effective January 1, 2020.  AB 5 essentially expanded the stricter ABC Test beyond the purposes of claims arising under Wage Orders (as was declared in Dynamex), to all claims arising under the California Labor Code and Unemployment Insurance Code. This means that the default standard for determining whether an individual is legally considered an “independent contractor” rather than an “employee” is part of the analysis that encompasses almost every aspect of California labor and employment law, including but not limited to wage and hour, unemployment insurance, workers compensation, mandatory sick leave, income tax, etc.  

As 2019 draws to a close and given the greatly expanded reach of AB 5, employers should consult with their legal counsel to analyze and determine whether they want to reclassify any of their California independent contractors as employeesOtherwise, effective January 1, 2020, employers may face an increase in risk of misclassification of independent contractors on an individual and collective basis.  

Please see our prior post “California Passes AB 5, Which May Require Employers to Offer Healthcare to California Workers Previously Classified as Independent Contractors” for additional information about Assembly Bill 5, exemptions to it, and its significance on California employers.  

Additional Resources: 

Assembly Bill 5  

Appellate Court Case Information 

The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.

 

Lizet Ramirez – Lizet is a Client Compliance Manager for Sequoia One, where she works with our clients to optimize and streamline benefits compliance. In her free time, Lizet enjoys live music, travel, hiking and spa days.