Update On California’s ABC Test for Independent Contractors

As previously reported, just over a year ago, the California Supreme Court issued a sweeping decision instituting a new test, called the “ABC test,” to determine whether a worker is properly classified as an independent contractor instead of an employee. The ABC test, which applies to all California employers, makes it difficult for companies to establish that workers qualify as independent contractors instead of employees.

The DLSE’s Recent Guidance

On May 3, 2019, the California Department of Labor Standards Enforcement (DLSE), issued an opinion letter providing California employers with insight on how the Labor Commissioner’s Office plans to apply the ABC test.

The DLSE concluded that the ABC test applies not just to obligations imposed by the wage orders, but also to Labor Code provisions that “derive” from or “rest on” an employer obligation under a wage order. According to the DLSE, those employer obligations under the wage orders include the following:

• Overtime
• Minimum wage
• Reporting time pay
• Recordkeeping (including itemized pay stub obligations)
• Business expense reimbursements for cash shortages, breakage, or loss of equipment, and for required uniforms, tools, and equipment
• Meal and rest period violations
• Waiting time penalties

Pending Legislation Regarding the ABC Test

The California legislature is currently considering legislation, known as AB 5, to expand the reach of the ABC test so that it applies to legal obligations beyond those contained in the wage orders. AB 5 will codify the ABC test so that it applies to the entire Labor Code and the Unemployment Insurance Code.

There are currently lobbying efforts underway to exempt certain professions from AB 5, such as for doctors, investment advisers and direct salespersons. (I have been working with the office of the Assembly member who authored AB 5, as well as the California Lawyer’s Association, to obtain an exemption in the law for attorneys.) However, whether or not AB 5 passes, the ABC test is the law of the land in California, and will continue as such unless the Supreme Court’s decision is overturned by the state legislature (which is not likely), or limited (such as by the exemptions in AB 5).

The Risks of Misclassification

Whether an employer is hit with a civil claim in court or an administrative claim with the Labor Commissioner’s office, the cost of misclassifying a worker as an independent contractor can be steep. Backpay for unpaid overtime, and penalties for meal and rest break violations and wage statement violations can add up quickly. It is not unusual for a misclassification claim to result in the employer owing tens of thousands of dollars based on misclassifying just a single worker.

Importantly, the fact a worker asked to be an independent contractor or has signed an independent contractor agreement is no defense under the ABC test.

What Should Employers Do?

• Proceed with caution when utilizing independent contractors in the workplace.
• Employers should consult with legal counsel to assess whether their independent contractors should be classified as employees under the ABC test, and on proper steps to take to minimize having an independent contractor be deemed an employee under the law.
• There are also steps that can be taken to minimize the amount of liability incurred in the event you decide to keep an independent contractor classification for a worker later found to be an employee.
• While an independent contractor agreement is not controlling, these agreements should be updated to reflect compliance with the requirements of the ABC test.