In 2018, the California Supreme Court adopted the ABC Test for determining whether a worker is an employee or independent contractor for purposes of wage claims in the Dynamex decision. During September 2019 the California legislature codified the Dynamex decision as applied to wage claims and expanded the scope of the ABC Test to apply to claims for unemployment insurance. Under the ABC Test, a worker is presumed to be an employee unless the putative employer can demonstrate that the worker meets the following three conditions:
1. The person 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
2. The person performs work that is outside the usual course of the hiring entity’s business
3. The person is customarily engaged in an independently-established trade, occupation or business of the same nature as that involved in the work performed.
The bill exempts certain occupations from the ABC Test including, among others, licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fishermen, workers providing licensed barber or cosmetology services and others performing work under a contract for professional services with another business entity or pursuant to a subcontract in the construction industry. The determination regarding whether workers in those industries are employees or independent contractors are governed by different pre-Dynamex tests.
There are significant advantages to paying workers as independent contractors instead of as employees. Among other advantages, the hiring company does not have to pay any portion of FICA, is not responsible for workers compensation coverage for the worker and is not liable for unemployment insurance. Employers may be tempted to pay workers as independent contractors, not as employees, but companies do so at their peril. This is particularly true in states such as California, that are increasingly taking a dim view of companies classifying workers as independent contractors.
Any company that pays any group of workers as independent contractors rather than as employees should contact their employment counsel to ensure the classification is appropriate under federal law and the laws of the state(s) in which they operate.
To learn more about this or other employment-related topics, contact Sean Monson at (801) 523-1234 or by sending an email to smonson@parsonsbehle.com
