According to the Labor Commissioner’s Office, misclassification of workers as independent contractors results in an estimated $7 billion per year loss of payroll tax revenue in the State of California. Nor are misclassified employees protected by labor laws of minimum wage, maximum hours, overtime, rest and meal breaks, other basic working conditions, anti-discrimination, retaliation, etc. Misclassifications also disadvantage employers that lawfully observe their obligations to their employees. In addition, the public may also bear the responsibility to assume some financial burdens regarding misclassified workers and their families.
In a ruling yesterday, the California Supreme Court laid out a three-point guideline for classifying a worker as an independent contractor. The three conditions are called the ABC test, which is to replace the old (and apparently too narrow scope) Borello* standard that has been used since 1989.
Under the ABC test, “a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes:
(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business;
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.”
Here are examples of differentiation the court made: “when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee.”
“On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company […], workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees. In the latter settings, the workers’ role within the hiring entity’s usual business operations is more like that of an employee than that of an independent contractor.”**
In the ruling, the California Supreme Court generally treats workers as employees to ensure wage order protection of those individuals that need and want such protection. The implications of the ruling are likely to entail a flood of re-classifications, affecting the employment classification of workers in just about all employment sectors in the state.
* S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989