Classifying the Problem: Independent Contractors and Employees in California
Your business is growing and you’re ready to take the next step in your growth story: your first hire. Maybe you’ve heard using independent contractors is the best way to go—no payroll taxes and no pesky timekeeping for meal and rest breaks, sick leave, or vacation.
But odds are, you’ve also heard something about the recent significant changes in California law that throw the whole subject into question. When do you have to treat a worker like an employee and when can they be properly classified as an independent contractor?
To start, workers are classified on the kind of work they’re doing, not how many hours they devote to that work. Just as you can have a contractor who works 40 hours a week, you can have an employee who works 4.
The ABC Test (AB5)
In California, the presumption is that all workers must be classified as employees, unless they can pass one of several stringent tests. The preliminary hurdle to leap is the three-pronged ABC test laid out in Assembly Bill 5 (AB5). To pass the test (and wind up with an independent contractor), you must meet all three prongs:
- The person is independent of the hiring organization in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- The person performs work that is outside the hiring entity’s business.
- The person is routinely doing work in an independently established trade, occupation, or business that is the same as the work being requested and performed.
The second element, performing work outside the hiring entity’s business, is the element many employers have trouble with. Unless an exemption applies under the law, you can’t hire an independent contractor to perform work that is within your company’s usual course of business. In other words, unless you fall under an exemption, your therapy practice can’t hire a therapist as a contractor and your mechanic’s shop can’t hire a mechanic as a contractor (although either could hire a plumber or a lawyer as an independent contractor).
Exceptions to the ABC Test
AB5 provides carve-outs for certain industries to provide them with more flexibility, and an amendment to the law, AB2257, created still more. Current exemptions include, among other things, exemptions for specific professions (e.g., physicians, lawyers, architects, engineers, accountants), certain business-to-business relationships, and the construction industry. Each exemption must be reviewed carefully, with its corresponding test applied, before a determination can be made as to the status of each individual worker.
For many of the exemptions, passing the test doesn’t necessarily let the business off the hook entirely, though. The worker must still pass muster under a more flexible but more complex multi-factor test (the Borello test, named after the case that made the factors famous).
- Whether the 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 the employer’s business;
- Whether the employer or the worker supplies the instrumentalities, tools, and the place for the worker doing the work;
- Whether the worker has invested in the business, such as in the equipment or materials required by their task;
- Whether the 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;
- The 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 the worker hires their own employees;
- Whether the employer has a right to fire at will or whether a termination gives rise to an action for breach of contract; and
- Whether or not the worker and the potential employer believe they are creating an employer-employee relationship (this may be relevant, but the legal determination of employment status is not based on whether the parties believe they have an employer-employee relationship).
Many workers will still have trouble qualifying as an independent contractor under the Borello test, which includes some factors familiar under AB5. Borello tends to tease out the real nature of the employer-worker relationship, and provides guidance on how an employer might consider tweaking their practices to tilt the calculus in favor of independent contractors.
Ready to Assess Your Worker?
Reach out to Full Circle Business Law and an attorney will walk you through the multiple tests, help you weigh the Borello factors, and give you the confidence to hire employees and engage contractors lawfully in California.