In California as in other states, companies often find it advantageous to hire independent contractors instead of payroll employees to perform specialized tasks. This relieves the company of the obligation to pay minimum wage and overtime and to provide workers’ compensation insurance. However, state law imposes a strict legal regimen — known as the ABC test — for determining whether an independent contractor is actually an employee in disguise. 

The ABC test has fundamentally shifted the landscape of worker classification in California. Prior to its adoption, companies often misclassified workers as independent contractors to avoid employee benefits and tax obligations. The ABC test makes it significantly harder to do so, as the burden of proof falls on the hiring entity to demonstrate that the three following conditions are met:

  • Free from control and direction — The worker must be free from the hiring entity's control in both the written contract and actual practice. This means the worker sets their own schedule, chooses their methods and tools and has little to no supervision. Micromanagement or mandatory training would indicate an employee classification.

  • Outside the usual course of business — The work performed must fall outside the hiring entity's core business activities. For example, a ridesharing company's core business is transportation, so drivers wouldn't meet this criteria. However, a marketing consultant providing specialized services would likely qualify.

  • Independently established trade — The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. 

There may be an exception to the ABC test when one business contracts to provide services to another. The exception can apply even if the services are provided directly to customers, as in the case of a vendor that provides staff for hotel restaurants. However, in that instance, the work must be performed under the name of the vendor, not the business receiving the services. 

Businesses have had to adapt their operations and hiring practices to comply with the ABC test. Some have reclassified workers as employees, leading to increased costs and operational changes since workers classified as employees gain access to minimum wage, overtime pay, unemployment insurance, workers' compensation and other benefits. Others have revised contracts and work arrangements to ensure workers meet the independent contractor criteria.

The ABC test isn't the only factor in determining worker classification. Other factors, like collective bargaining agreements and specific industry exemptions, can also play a role. Additionally, AB 5 includes carve-outs for certain professions, such as doctors and lawyers, who are not subject to the ABC test.

At Garcia & Gurney, a Law Corporation, we represent clients throughout the Tri-Valley area, helping them with matters related to classifying employees. To schedule a consultation, call 925-468-0400 or contact us online.