On September 30, 2021, California updated its exceptions to the law that regulates independent contractor classification (AB 5). AB 5 requires a three-part test, also known as the ABC test, to determine whether workers are employees or independent contractors. The amendments become effective on January 1, 2022.
What’s the ABC Test?
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:
- 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;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Are There Exceptions to the ABC Test?
While the ABC test is the applicable test for most workers, for some occupations and industries Labor Code sections 2775 et seq apply the Borello multifactor test. 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.
For a list of occupations in which the Borello test would apply, employers are encouraged to review the the California Department of Industrial Relations’ (DIR) Independent Contractor versus Employee Guidance.
Next Steps for Employers
Employers should become familiar with the ABC test, its exemptions and the updates that become effective in 2022. Further, employers are encouraged to consult with their legal counsel and/or tax professional for additional guidance on federal and state laws regarding worker classification.