MISCLASSIFICATION UNDER THE ABC TEST

In Dynamex Operations W. v. Superior Court, the California Supreme Court addressed the long-standing issue of whether a worker in California is classified as an employee or an independent contractor. 4 Cal.5th 903 (2018).

In its ruling, the Court established the “ABC Test,” a balancing test used to determine a worker’s employment classification status. Following the Dynamex decision, California Governor Gavin Newsom codified the ABC Test into law through Assembly Bill 5 (“AB 5”). The enactment of AB 5 into California law affirmatively sets the standard for classifying workers in the state.

First, and perhaps most notably, the ABC Test presumes that all California workers are employees. This means a worker can only be classified as an independent contractor if the hiring entity proves that the worker meets all three of the following conditions:

• To classify a worker as an independent contractor under the ABC Test, the hiring entity must prove that the worker meets all three of the following conditions:

  1. The worker is free from the control and direction of the hiring entity in performing the work, both under the contract and in practice.
  2. The worker performs work outside the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

  Dynamex, supra, 4 Cal.5th at 955-956; see AB 5.

If the hiring entity fails to satisfy any of the three elements above, the worker must be classified as an employee.

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 “A” of the ABC Test: Control and Direction

Part “A” of the ABC Test evaluates the extent to which a hiring entity exerts control and direction over a worker. The California Supreme Court provided the following guidance on how Part “A” should be applied:

• The hiring entity must prove that the worker is free from its control to satisfy Part “A” of the ABC Test. Dynamex, supra, 4 Cal.5th at 958.
• A worker who is subject—either contractually or in practice—to the level of control typically exercised over employees will be classified as an employee. Id.
• A business does not need to control every detail of the work to be found to have exerted sufficient control over the worker; rather, the overall nature of the work arrangement will determine whether an employer-employee relationship exists. Id.

To satisfy Part “A” of the ABC Test, the hiring entity must establish that the worker is free from its control and direction. Id.

Does the Worker Perform Work that is Outside the Usual Course of the Hiring Entity’s Business?

Part “B” of the ABC Test: Work Outside the Usual Course of Business

To satisfy Part “B” of the ABC Test, the hiring entity must establish that:

• The worker performs work that is outside the usual course of its business. Dynamex, supra, 4 Cal.5th at 961.
• Contracted workers performing services similar to those of existing employees will likely be classified as employees, as they are considered to be working within the hiring entity’s usual course of business. Id. (citing Rutherford Food Corp. v. McComb, 331 U.S. 722, 729 (1947)).

 

Examples of Work Outside the Hiring Entity’s Usual Course of Business

• A retail store hires an outside plumber to repair a leak in its bathroom.
• A retail store hires an outside electrician to install a new electrical line.

Examples where services wire within the hiring entity’s usual course of business:

• 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.
• When a bakery hires cake decorators to work on a regular basis on its custom-designed cakes. Id. at 959-960.

Lastly, the Court in Rutherford emphasized the importance of classifying workers correctly, stating:

“Treating all workers whose services are provided within the usual course of the hiring entity’s business as employees is important to ensure that those workers who need the fundamental protections afforded by the wage order do not lose those protections.”

Rutherford Food Corp. v. McComb, supra, 331 U.S. at 729.

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?

Part “C” of the ABC Test: Independently Established Trade or Business

To satisfy Part “C” of the ABC Test, the hiring entity must prove that:

• The worker is customarily engaged in an independently established trade, occupation, or business. Dynamex, supra, 4 Cal.5th at 963.
• The hiring entity cannot unilaterally determine a worker’s status simply by labeling them as an “independent contractor” or by requiring them to sign a contract designating them as such. Dynamex, supra, 4 Cal.5th at 962 (citing G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 342, 349, 358-359 (1989); Rutherford, supra, 331 U.S. at 729).
• The term “independent contractor” refers to a worker who has independently chosen to go into business for themselves. Id. (citing Borello, supra, 48 Cal.3d at 354 [describing an independent contractor as a worker who “has independently chosen the burdens and benefits of self-employment”].)
• A worker who has independently gone into business generally takes the usual steps to establish and promote their independent business.

Examples of an Independently Established Business

A worker is more likely to satisfy Part C of the ABC Test if they have taken steps to establish an independent business, such as:

• Incorporation
• Licensure
• Advertising services
• Routinely offering services to the public or multiple potential clients
• Similar actions that demonstrate independent business operations

 

Dynamex, supra, 4 Cal.5th at 962.

When Part C Is Not Met

• If a worker’s employment relies on a single employer, they do not meet the requirements of Part C.
• For example, Part C was not satisfied where a taxi driver was required to hold a municipal permit that could only be used while employed by a specific taxi company. See Garcia, supra, 28 Cal.App.5th at 575.
• The independent business must already exist at the time the work is performed—potential future business operations do not qualify. Id. at 574.

Misclassification and Wage Order Violations

If a worker does not meet the definition of an independent contractor but is designated as such solely by the hiring entity, courts have recognized:

“There is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification.” Id., italics added.

A company that labels employees who are not engaged in an independently established business as independent contractors has therefore:

“Unquestionably violated the fundamental purposes of the wage order.” Id.

WHEN THE ABC TEST DOES NOT APPLY

AB 5 and California Labor Code section 2775 et seq. do not require that the Dynamex ABC Test be used in all situations. Situations where the ABC Test does not apply include:

1. Instances in which the Legislature or the Industrial Welfare Commission (“IWC”) has defined the employment relationship in a specific way. In such cases, the ABC test will not otherwise apply to establish employee status or employer liability. Rather, the specific language contained in the IWC wage orders, the California Labor Code, or Unemployment Insurance Code will remain in effect.
2. Where a court determines the ABC test cannot apply for a reason other than an express exception, the Borello test will apply. For example, if a court were to determine in a particular case that the ABC test is preempted by an applicable federal law, the Borello test would be used.
3. Finally, the ABC test may not apply for certain occupations and contracting relationships.

 

DYNAMEX ABC TEST COMPARED TO THE BORELLO TEST

Where the Borello Test and the Dynamex ABC Test are the Same:

Both the Dynamex ABC Test and the Borello Test presume that a worker is an employee, placing the burden on the hiring entity to prove that the worker qualifies as an independent contractor.

Where the Dynamex ABC Test and the Borello Test Differ:

Under the Borello test, no single factor is determinative in assessing whether a worker is an employee or an independent contractor. Instead, the Borello test applies a multi-factor balancing approach, where the facts and circumstances of each worker’s situation are weighed against the Borello factors to determine their classification.

Courts evaluate each case individually, considering all potentially relevant facts, including:

1. The nature of the work
2. The overall arrangement between the parties
3. The purpose of the applicable law

This case-by-case analysis ensures a comprehensive assessment of the employment relationship.

The Dynamex ABC Test differs from the Borello Test in that it is designed to provide a clearer and more objective standard for both hiring entities and workers to determine employment classification. Unlike Borello’s multi-factor balancing test, the ABC Test establishes a presumption of employee status unless the hiring entity can affirmatively prove all three prongs of the test. If the hiring entity fails to satisfy even one element, the worker is automatically classified as an employee.

For assistance or more information regarding California worker classification and how to avoid misclassification, contact the employment attorneys at San Diego Biz Law, APC.

The material in this article, provided by San Diego Biz Law, APC, is designed to provide informative and current information as of the date of the post. It should not be considered, nor is it intended to constitute, legal advice or promise similar outcomes.