Independent contractor versus employee
In September of 2019, Governor Newsom signed Assembly Bill (AB) 5 into law. The new law addresses the “employment status” of workers when they are claimed to be an independent contractor and not an employee.
|1.||Q.||What is AB 5 and what does it do? |
|A.||AB 5 is a bill the Governor signed into law in September 2019 addressing employment status when a hiring entity claims that the person it hired is an independent contractor. AB 5 requires the application of the “ABC test” to determine if workers in California are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission (IWC) wage orders. The California Supreme Court first adopted the ABC test in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903. Among other things, AB 5 added a new section to the Labor Code addressing these issues (section 2750.3).|
|2.||Q.|| What is the ABC test?|
|A.||Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:|
|3.||Q.||How do you apply the ABC test to worker relationships?
|A.||Below is a summary of the California Supreme Court’s explanation of how to apply the ABC test.|
Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
PART B: Does the worker perform work that is outside the usual course of the hiring entity’s business
PART C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?
|4.||Q.||Do AB 5 and Labor Code section 2750.3 require use of the ABC test in all situations?|
|A.||No. There are situations where the ABC test will not apply:|
|5.||Q.||What is the Borello test?|
|A.||The California Supreme Court established the Borello test in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341. The test relies upon multiple factors to make that determination, including whether the potential employer has all necessary control over the manner and means of accomplishing the result desired, although such control need not be direct, actually exercised or detailed. This factor, which is not dispositive, must be considered along with other factors, which include:|
Borello is referred to as a “multifactor” test because it requires consideration of all potentially relevant facts – no single factor controls the determination. Courts have emphasized different factors in the multifactor test depending on the circumstances. For example, where the employer does not control the work details, an employer-employee relationship may be found if (1) the employer retains control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative, Inc. v. Workers’ Compensation Appeals Board (1991) 226 Cal.App.3d 1288.)
As the Supreme Court has explained, Borello “emphasizes statutory purpose as the touchstone for deciding whether a particular category of workers should be considered employees rather than independent contractors for purposes of social welfare legislation.” (Dynamex, 4 Cal.5th at 935.) The emphasis on statutory purpose “sets apart the Borello test for distinguishing employees from independent contractors from the [common law] standard . . . in which the control of details factor is given considerable weight.” (Id.)
|6.||Q.||How does the ABC test compare to the Borello test?
|A.||Both the Borello test and the ABC test assume that the worker is an employee and the hiring entity must prove that the worker is an independent contractor. |
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.
|7.||Q.||Do AB 5 and Labor Code section 2750.3 require use of the ABC test to determine if a worker is an independent contractor for all occupations in California? |
|A.||No. While the ABC test is the applicable test for most workers, for some jobs and industries Labor Code section 2750.3 applies the Borello multifactor test, described above. For some occupations, the Borello test applies without further requirements. However, for other occupations and industries, the Borello test applies instead of the ABC test only after the hiring entity satisfies other requirements first. Finally, for certain real estate licensees and repossession agencies, standards under the California Business and Professions Code will continue to apply. |
Occupations where the Borello test applies instead of the ABC test under Labor Code section 2750.3:
Occupations or contracting relationships where Labor Code section 2750.3 requires that additional requirements must first be met in order to use the Borello test instead of the ABC test:
For two specific industries, special rules under Labor Code section 2750.3 require examination under the Business and Professions Code:
The exemptions from the ABC test for certain industries, occupations, or contracting relationships may involve some complicated rules and criteria which are not set forth above. Employers and workers should seek independent advice and counsel if they have questions about the applicability of any exemption to their particular case.
|8.||Q.||When do the changes from AB 5 become effective? |
|A.||The law becomes effective January 1, 2020. However, different timeframes apply depending on the circumstances: |
|9.||Q.|| Does AB 5 mean that workers will automatically be reclassified as employees instead of independent contractors?|
|A.||No. Labor Code section 2750.3 starts with an assumption that all workers are employees, and provides the test that a hiring entity would have to satisfy to prove that the workers are independent contractors. Employers may wish to evaluate their working arrangements and ensure they are appropriately classifying their workers as required under the law, and workers may file a claim if they believe they have been misclassified (see Question 15).|
|10.||Q.||If a hiring entity has a worker sign an agreement stating that the worker is an independent contractor, does not make payroll deductions or withholdings for taxes or Social Security for the worker, and at the end of the year provides the worker with an IRS Form 1099 rather than a W-2, does this mean the worker is an independent contractor?|
|A.||No. Being labeled an independent contractor, being required to sign an agreement stating that one is an independent contractor, or being paid as an independent contractor (that is, without payroll deductions and with income reported by an IRS Form 1099 rather than a W-2), is not what determines employment status. The ABC test — or where appropriate, the Borello test or other standard under Labor Code section 2750.3 (see Questions 2 & 5 above) — are used to determine employment status. An employer cannot change a person’s status from that of an employee to one of an independent contractor by requiring a written agreement to that effect or by giving them an IRS Form 1099 instead of a W-2. |
|11.||Q.||Are there penalties for misclassifying workers as independent contractors? |
|A.||Yes. In addition to penalties that may be assessed for wage violations associated with a worker being misclassified as an independent contractor, there are civil penalties for willful misclassification. Under Labor Code section 226.8, which prohibits the willful misclassification of individuals as independent contractors, there are civil penalties of between $5,000 and $25,000 per violation. Willful misclassification is defined as voluntarily and knowingly misclassifying an employee as an independent contractor. |
|12.||Q.||What difference does it make if a worker is an employee rather than an independent contractor? |
|A.||California’s wage and hour laws (e.g., minimum wage, overtime, meal periods and rest breaks, etc.), workplace safety laws, and retaliation laws protect employees, but not independent contractors. Additionally, employees can go to state agencies such as the Labor Commissioner’s Office to seek enforcement of these laws, whereas independent contractors must resolve their disputes or enforce their rights under their contracts through other means. |
|13.||Q.||Do AB 5 and Labor Code section 2750.3 apply to public entities? |
|A.||Yes. However, many provisions of the Labor Code and most sections of the IWC Wage Orders do not apply to public employees. (See, e.g., Johnson v. Arvin-Edison Water Storage District (2009) 174 Cal.App.4th 729.) AB 5 does not change that. |
|14.||Q.||Do AB 5 and Labor Code section 2750.3 apply to volunteers and interns?|
|A.||No. AB 5 and the ABC test apply to the question whether someone is an employee or an independent contractor. There are separate standards that apply to the question whether someone is an employee rather than a volunteer or intern. (Please see the Division of Labor Standards Enforcement Policy and Interpretations Manual and Opinion Letters for more information.) |
|15.||Q.||What should workers do if their employer keeps them under independent contractor status when they think they should be considered an employee? |
|A.||A worker can file one or more of the following:|
|16.||Q.||Are there protections if a worker is retaliated against because the worker complains about being misclassified and losing out on employee rights like being paid overtime?|
|A.||Yes. Workers who face discrimination or retaliation in any manner whatsoever — for example, if the employer fires a worker because they complain about being classified as an independent contractor or not being paid overtime, or because the worker filed a claim or told the employer that they intend to file a claim with the Labor Commissioner — can file a discrimination/retaliation complaint with the Labor Commissioner’s Office. However, it is important to note that the Labor Commissioner does not have jurisdiction over workers who are in fact independent contractors. The worker can also file a lawsuit in court against the employer instead of filing a complaint first with the Labor Commissioner’s Office. |
|17.||Q.||Is there a grace period for employers to get into compliance with their payroll tax obligations after the effective date of AB 5? |
|A.||No. Employers must pay any payroll taxes that are due based on the employees they have as of January 1, 2020. If employers are not yet registered with EDD as an employing unit, they are encouraged to register and begin filing and paying their taxes (based on established due dates per calendar quarter) utilizing EDD’s online e-Services for Business.|
|18.||Q.||How are employment status determinations made by EDD for purposes of Unemployment Insurance or State Disability Insurance benefits?|
|A.||EDD may make employment determinations through an employment tax audit or through determining a claim for Unemployment Insurance (UI) or State Disability Insurance (SDI) benefits. For work performed prior to January 1, 2020, employment status will be determined by the existing provisions of Unemployment Insurance Code section 621(b), which requires EDD to use the Borello test. For work performed on or after January 1, 2020, EDD will determine employment status based on the tests provided in AB 5. |
|19.||Q.||Do existing statutory exclusions to employment under the Unemployment Insurance Code remain in effect after the passage of AB 5? |
|A.||The Unemployment Insurance Code excludes certain types of services from the Code’s definition of employment, which affects who is eligible for Unemployment Insurance benefits. These exclusions remain in effect after AB 5. |
|20.||Q.||What risks do employers face under the Unemployment Insurance Code for not properly classifying employees? |
|A.||If EDD finds that workers are misclassified as independent contractor(s) when they should be classified as employee(s), employers face significant risks related to failing to comply with their obligations under the Unemployment Insurance Code. These risks include under-paying their taxes and having to pay their employees’ share of payroll taxes, both of which may result in incurring penalties and interest. |
|21.||Q.||What are the tax implications if a worker is classified as an independent contractor for federal tax purposes and employee for California tax purposes? |
|A.||The Franchise Tax Board, the state entity that administers personal income and franchise tax, will be providing guidance that addresses this question. There are different tax reporting and filing requirements for workers classified as employees or independent contractors. Once released, FTB’s guidance will also be available from this webpage. |
|22.||Q.||Can workers be considered employees under California law if they are not considered employees under federal law? |
|A.||Yes. Workers may be considered employees and have protections under California law, even if they are determined not to be employees under federal law. This is because the tests used to determine employee status under California law differ from the tests used under federal law, such as the federal Fair Labor Standards Act (FLSA). |
For more information, please visit the Labor & Workforce Development Agency Employment Status Portal.