The new standard for classifying independent contractors
and employees
In 2018, the California Supreme Court decided in the Dynamex Operations West, Inc v. Superior Court of Los Angeles case that set aside a longstanding standard of classifying independent contractors. The decision focused on a company’s control over workers and identified the rigid “ABC test” to determine whether workers were independent contractors or employees. Assembly Bill 5, signed into law by Governor Newsom with an effective date of January 1, 2020, expanded on the Dynamex decision and adopted the “ABC Test” as the new standard for determining independent contractor status.
Prior to January 1st, businesses used the “Borello Test” since 1989 to determine independent contractor status. Contractors needed to be skilled in their occupation so that they could work without supervision. They needed to supply their own tools, equipment, business license, office, and have other clients. They were also expected to set their own rates and business hours.
The “ABC Test” requires companies to assume a worker is an employee unless all the following can be proved:
A) That the worker is free from control and direction from the company in connection with the performance of the work
B) That the worker performs work that is outside the usual course of the company’s business; and
C) That the worker is customarily engaged in an independently established trade,occupation, or business of the same nature as the work performed.
As with many rules, there are several exceptions to the “ABC Test.” For example,the professional services exemption allows companies to continue to use the “Borello Test” to determine independent contractor status for services such as marketing, human resources administration, graphic design, tax preparation, and grant writing. The new law also allows licensed estheticians, manicurists, barbers, and cosmetologists to continue as independent contractors using the “Borello Test.”
What does that mean for our local business community? For most, it is going to be business as usual. For example, many businesses use a graphic designer or a tax preparation service because those skills are outside the course of a company’s business. For these businesses, the graphic designer or tax preparer’s independent contractor status doesn’t change.
But what happens when an independent contractor needs support for a client’s project? They may need to hire an employee to perform that work. There are, of course, exceptions to this rule as well that harken back to the “Borello Test,” which include that services be provided directly to the independent contractor rather than to the client.
There are also consequences for misclassifying independent contractors. Businesses could be liable for unpaid wages, workers’ compensation claims, and unemployment insurance benefits. There are additional penalties for failure to pay wages of $100 to $200 per employee per pay period and up to 25 percent of wages not paid for each employee for each pay period.
There is a lot at stake here, Lake County business leaders. Please reach out to an employment law attorney or human resources expert if you hire any independent contractors that do not clearly meet the “ABC Test.”