In order to stay in compliance with wage orders in the state of California, if your company wants to establish that a worker is not an employee, but rather an independent contractor, you must now be able to show the employee meets a three-part contractor test set forth by the California Supreme Court. The independent contractor test has been the same since approximately 1989, so the new test for independent contractor status that the court recently set out represents a significant change for employers in the state of California.
The New California Contractors Test
In the state of California, wages and hours are regulated by a commission called the Industrial Welfare Committee (regularly referred to as the IWC). The IWC’s regularly issues orders that cover issues such as exemptions, minimum wages, meal and rest periods, credits for meals and lodging, requirements for seating and temperatures, and other requirements related to working in the state of California. When the IWC issues a wage order, it does not apply to independent contractors, only to employees. As a result, how the IWC determines whether a worker is an employee or an independent contractor becomes a very important determination.
In the most recent decision on the test for independent contractor status handed down by the California Supreme Court, the court indicated that the IWC should look to the “ABC test,” as used in other jurisdictions, to determine independent contractor status. The new test for independent contractor status requires the company hiring the worker to show three factors have been met when the company classifies a worker or workers as independent contractors versus employees.
The three factors include:
A: Both on paper, in the contract for the work to be performed, and in practice, the worker must be free from the direction and control of the company that hired them as it relates to the performance of the contracted work;
B: The work in question must be outside the normal course of the company’s business;
C: The worker or workers in question must also be regularly occupied in an independently established business, occupation, or established a trade.
The IWC can consider a worker as an employee and not an independent contractor if the hiring business cannot establish all three prongs of the test for independent contractors. In that situation, the wage orders of the IWC would then apply the worker.
Because this new test was recognized by the Supreme Court, previous Supreme Court tests have been abandoned. The court’s recognition of the ABC test essentially rejects the previously followed test for independent contractors, commonly known as the Borello test (named for the Supreme Court Case that established the previous contractor test). The old test required the employer to conduct a multi-factor test to determine whether a worker could properly be considered an independent contractor. The primary factor that was considered under the old test was whether the hiring business controlled the means and manner of accomplishing the work in question. It also had nine other intertwined factors that could be applied and weighted differently depending on the circumstances of the relationship between the business and the worker.
The new ABC test for independent contractors is intended to provide greater consistency and clarity by simplifying the analysis that a hiring business needs to conduct when classifying the workers that conduct work for a business. It is predicted to cut down on some of the inconsistency that went hand-in-hand with the complexity of the old contractor test.
While there is no question among legal scholars that the ABC test will control going forward, or that the old test has been abandoned, there are a number of questions about whether or not courts will apply the test retroactively to past relationships or existing relationships between workers and businesses or whether it will take effect on a go-forward basis only. Advocacy groups are seeking clarification on the issue of how the new test will be applied to current and past arrangements between workers and the hiring businesses.