On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 (AB 5) into law, addressing the employment status of workers when a hiring entity claims the worker is an independent contractor and not an employee. AB 5 requires the application of the ABC test to determine when workers are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission (IWC) wage orders.
The California Supreme Court first adopted the ABC test in Dynamex Operations W., Inc. v. Superior Court , 4 Cal.5th 903, 232 Cal. Rptr. 3d 1, 416 P.3d 1 (Cal. 2018). The court noted that under this test, a worker is considered an independent contractor to whom a wage order will not apply if the hiring entity establishes:
- 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 such work and in fact
- that the worker performs work that is outside the usual course of the hiring entity’s business
- that 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
Applying the ABC Test
As it relates to all three parts of the ABC test, determining whether a worker is free from the control and direction of a hiring entity in the performance of their work will mean that the hiring entity must establish that the worker is free of such control to satisfy part A of the ABC test. Any worker who is subject to the type and degree of control a business typically exercises over employees would be considered an employee, but a business does not have to control the precise manner or details of work in order to be found to have maintained the necessary control that an employer ordinarily possesses over its employees.
When it comes to whether a worker performs work that is outside the usual course of the hiring entity’s business, a hiring entity must establish that the worker performs work that is outside the usual course of its business in order to satisfy part B of the ABC test. Contracted workers who provide services in a role comparable to that of existing employees are often viewed as working in the usual course of the hiring entity’s business. Examples where services are not part of the hiring entity’s usual course of business could include retail stores hiring outside plumbers to repair leaks in bathrooms or outside electricians to install new electrical lines, but examples of services being part of the hiring entity’s usual course of business include clothing manufacturing companies hiring seamstresses to make dresses from cloth and patterns supplied by the company that are later sold by the company or bakeries hiring cake decorators to work on a regular basis for custom-designed cakes.
As it relates to whether workers are customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity, a hiring entity must prove that the worker is customarily and currently engaged in an independently established trade, occupation, or business. A hiring entity cannot unilaterally determine a worker’s status simply by assigning the worker the label independent contractor or by requiring the worker, as a condition of hiring, to enter into a contract that designates the worker an independent contractor.
Part C requires that an independent business operation be in existence at the time the work is performed. An individual who independently makes the decision to go into business generally takes the usual steps to establish and promote that independent business.
The Borello Test
The California Supreme Court established the Borello test in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations, (1989) 48 Cal.3d 341, which relies upon multiple factors to make a determination, including whether a potential employer has all necessary control over the manner and means of accomplishing a desired result, although this control does not need to be direct, actually exercised or detailed. This factor must be considered along with other factors, including:
- Whether a worker performing services holds themselves out as being engaged in an occupation or business distinct from that of the employer
- Whether the work is a regular or integral part of an employer’s business
- Whether an employer or worker supplies the instrumentalities, tools, and the place for the worker doing the work
- Whether a worker has invested in the business, such as in the equipment or materials required by their task
- Whether a service provided requires a special skill
- The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision
- A worker’s opportunity for profit or loss depending on their managerial skill
- The length of time for which the services are to be performed
- The degree of permanence of the working relationship
- The method of payment, whether by time or by the job
- Whether a worker hires their own employees
- Whether an employer has a right to fire at will or whether a termination gives rise to an action for breach of contract
- Whether or not a worker and potential employer believe they are creating an employer-employee relationship
Borello is a multifactor test because it requires consideration of all potentially relevant facts and no single factor controls a determination. Various sections of the California Labor Code establish where the Borello test must be used instead of the ABC test.
Contact Our Mountain View Startup & Small Business Attorney
Making independent contractor determinations can be one of the most demanding propositions for any business owner. Kalia Law P.C. understands all of the complications that come along with these concerns and helps businesses all over California classify their employees properly.
Our firm knows how stressful these situations can be for business owners and we will work with you to ensure that you are compliant with the law. Call (650) 701-7617 or contact our Mountain View startup & small business attorney online to schedule a free consultation.