On Monday, April 30, 2018, the California Supreme Court issued a landmark decision that reinterpreted and ultimately rejected the Borello test for determining whether workers should be classified as either employees or independent contractors for the purposes of the California wage orders.
The Court embraced a standard presuming that all workers are employees instead of contractors, and placed the burden on any entity classifying an individual as an independent contractor of establishing that such classification is proper under the newly adopted “ABC test”, outlined below.
The Court framed its decision by broadly characterizing the misclassification of independent contractors as harmful and unfair to workers, honest competitors, and the public as a whole.
In a previous case, a worker is an employee if he or she is “employed” by an “employer,” and “employ” is defined as: “ (a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.” If any of these standards are met, the worker is an employee and not an independent contractor.
The Court, however, conceded that the “suffer or permit to work” standard is a “term of art” that cannot be interpreted literally because it would obviously encompass workers who are traditional independent contractors (e.g. plumbers) and would more or less eviscerate the commonly understood distinction between employees and independent contractors. Consequently, the Court limited the scope of “suffer or permit to work” by adopting the “ABC test.”
The ABC Test
Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the putative employer proves:
(A) that 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;
(B) that the worker performs work that is outside the usual course of the hiring entity’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.
Note that each of these requirements need to be met in order for the presumption that a worker is an employee to be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor.
Indeed, many businesses, particularly those operating in the “gig economy,” are fundamentally premised on the use of independent contractors. In light of this case, any businesses operating in California that treat workers as independent contractors should confer with their legal counsel to review the relationship under the “ABC test” and determine whether workers should be reclassified.
A Solution for your 1099 Independent Contractors
If you determine a contractor should be a W2 employee BUT there are reasons you do not want to bring them onto your payroll (e.g. you want to try them out first, a part time or short term employee would be too much administrative work, or there is a head count freeze) then you can payroll them through a staffing service like Premierehire until you are ready.
An earlier blog provides a summary of the potential fines for misclassification as well as links to helpful government websites that can provide more detail on California & federal guidelines for 1099 contractors.
Another good summary article on this topic can be found at Ogletree Deakins.