Independent contractor versus employee

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In September of 2019, Governor Newsom signed Assembly Bill (AB) 5 into law. The new law addresses the “employment status” of workers when the hiring entity claims the worker is an independent contractor and not an employee.

• The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
• The worker performs work that is outside the usual course of the hiring entity’s business; and
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

• The hiring entity must establish that the worker is free of such control to satisfy part A of the ABC test. (Dynamex, 4 Cal.5th at 958.)
• A worker who is subject, either as a matter of contractual right or in actual practice, to the type and degree of control a business typically exercises over employees would be considered an employee. (Id.)
• Depending on the nature of the work and overall arrangement between the parties, a business need not control the precise manner or details of the work in order to be found to have maintained the necessary control that an employer ordinarily possesses over its employees. (Id.)

• The 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. (Dynamex, 4 Cal.5th at 959.)
• Contracted workers who provide services in a role comparable to that of an existing employee will likely be viewed as working in the usual course of the hiring entity’s business. (Id.)
• Examples where services are not part of the hiring entity’s usual course of business:
  • When a retail store hires an outside plumber to repair a leak in a bathroom on its premises.
  • When retail store hires an outside electrician to install a new electrical line. (Id.)
  • When a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company.
  • When a bakery hires cake decorators to work on a regular basis on its custom-designed cakes. (Id. at 959-960.)
  • The hiring entity must prove that the worker is customarily and currently engaged in an independently established trade, occupation, or business. (Dynamex, 4 Cal.5th at 963.)
  • The 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. (Dynamex, 4 Cal.5th at 962.)
  • Part C requires that the independent business operation actually be in existence at the time the work is performed. The fact that it could come into existence in the future is not sufficient. (See Garcia v. Border Transportation Group, LLC (2018) 28 Cal.App.5th 558, 574.)
  • An individual who independently has made the decision to go into business generally takes the usual steps to establish and promote that independent business. Examples of this include:
    • Incorporation, licensure, advertisements;
    • Routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like. (Dynamex, 4 Cal.5th at 962.)
    • Sometimes the Legislature or the Industrial Welfare Commission has defined the employment relationship in a specific way. In such cases, the ABC test will not otherwise apply to establish employee status or employer liability. Rather, the specific language contained in the IWC wage orders, the Labor Code, or Unemployment Insurance Code will remain in effect.
    • Additionally, where a court determines the ABC test cannot apply for a reason other than an express exception, the Borello test, described in Question 5 below, will apply. For example, if a court were to determine in a particular case that the ABC test is preempted by an applicable federal law, the Borello test would be used.
    • Finally, the ABC test may not apply for certain occupations and contracting relationships. See Question 7 below.
    1. Whether the worker performing services holds themselves out as being engaged in an occupation or business distinct from that of the employer;
    2. Whether the work is a regular or integral part of the employer’s business;
    3. Whether the employer or the worker supplies the instrumentalities, tools, and the place for the worker doing the work;
    4. Whether the worker has invested in the business, such as in the equipment or materials required by their task;
    5. Whether the service provided requires a special skill;
    6. The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision;
    7. The worker’s opportunity for profit or loss depending on their managerial skill;
    8. The length of time for which the services are to be performed;
    9. The degree of permanence of the working relationship;
    10. The method of payment, whether by time or by the job;
    11. Whether the worker hires their own employees;
    12. Whether the employer has a right to fire at will or whether a termination gives rise to an action for breach of contract; and
    13. 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).

    However, the ABC test is designed to make it easier for both businesses and workers to determine in advance whether a worker is an independent contractor or an employee. In other words, it is aimed at being more predictable than the multifactor approach used under Borello.

    Unlike the ABC test — in which the inability of the hiring entity to demonstrate any part of the three-part test means that the worker is not an independent contractor — under the Borello test, no single factor determines whether a worker is an employee or an independent contractor. As described above in Question 5, courts consider all potentially relevant factors on a case-by-case basis in light of the nature of the work, the overall arrangement between the parties and the purpose of the law.

    • Certain occupations in connection with creating, marketing, promoting, or distributing sound recordings or musical compositions
    • Certain licensed insurance agents, brokers, and persons who provide underwriting inspections, premium audits, risk management, claims adjusting, third-party administration consistent with use of the term “third-party administrator,” as defined in subdivision (cc) of Section 10112.1 of Title 8 of the California Code of Regulations, or loss control work for the insurance and financial service industries
    • Certain licensed physicians, surgeons, dentists, podiatrists, psychologists, or veterinarians
    • Certain licensed attorneys, architects, landscape architects, engineers, private investigators and accountants
    • Certain registered securities broker-dealers or investment advisers or their agents and representatives
    • Certain direct salespersons
    • Certain manufactured housing salespersons
    • Certain licensed commercial fishers (only through December 31, 2025 unless extended by the Legislature)
    • Certain newspaper distributors or carriers (only through December 31, 2024 unless extended by the Legislature)
    • Certain persons engaged by an international exchange visitor program
    • Certain competition judges
    • Certain home inspectors, as defined in Section 7195 of the Business and Professions Code, and subject to the provisions of Chapter 9.3 (commencing with Section 7195) of Division 3 of that code.
    • Certain professional services contracts for marketing; human resources administration; travel agents; graphic design; grant writers; fine artists; enrolled agents licensed to practice before the IRS; payment processing agents; still photographers / photojournalists; videographers; photo editors to a digital content aggregator; freelance writers, translators, editors, copy editors, illustrators, or newspaper cartoonists; content contributors, advisors, producers, narrators, or cartographers for a journal, book, periodical, evaluation, other publication or educational, academic, or instructional work in any format or media; licensed barbers, cosmetologists, electrologists, estheticians, or manicurists (manicurists only through December 31, 2024); specialized performing arts Master Class Instructors, appraisers, registered professional foresters, and data aggregators, as defined. Borello applies to determine whether the individual is an employee of the hiring entity if initial requirements are met.
    • Relationships between two individuals working on a single engagement event, defined as a stand-alone non-recurring event in a single location, or a series of events in the same location no more than once a week. Borello applies if initial requirements are met.
    • Certain individuals performing work under a subcontract in the construction industry, including construction trucking (with certain specific conditions applicable to construction trucking only through December 31, 2024). Borello and Labor Code section 2750.5 apply to determine whether the individual is an employee of the contractor if initial requirements are met.
    • Certain service providers who are referred to customers through referral agencies to provide services including, but not limited to, graphic design, web design, photography, tutoring, consulting, youth sports coaching, caddying, wedding or event planning, services provided by wedding and event vendors, minor home repair, moving, errands, furniture assembly, animal services, dog walking, dog grooming, picture hanging, pool cleaning, yard cleanup, and interpreting. Borello applies to determine whether the service provider is an employee of the referral agency if initial requirements are met.
      • The following services are excluded: services provided in an industry designated as a high hazard industry, janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction services other than minor home repair.
      • Certain real estate licensees, for whom the test of employee or independent contractor status is governed by section 10032(b) of the Business and Professions Code. (If that section is not applicable, then Borello is the applicable test for purposes of the Labor Code, except ABC will be the applicable test for purposes of workers’ compensation as of July 1, 2020.)
      • Certain repossession agencies, for which the determination of employee or independent contractor status is governed by Section 7500.2 of the Business and Professions Code.
      For purposes of IWC wage orders and violations of the Labor Code relating to wage orders: The ABC test was already in effect for these purposes (as explained in a Labor Commissioner’s Office Opinion Letter) prior to 2020 due to the Dynamex Supreme Court decision. AB 5 is intended to codify — meaning write into the Labor Code — the ABC test from Dynamex, which has been the law in California since the opinion was issued in 2018.

      • A wage claim with the Labor Commissioner’s Office
      • A Report of Labor Law Violation with the Labor Commissioner’s Office for widespread violations affecting a group of workers
      • A lawsuit in court