California Independent Contractor Classification Changes

April 30th, 2018 saw a marked shift in the future of worker classification in California, now making it one of the most difficult places in the United States to be classified as an independent contractor (IC).The state now uses a new three-factor ABC classification test implemented by the California Supreme Court, moving away from the common law test that was previously used to determine IC status.

The court’s new test states:

The [new] ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (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 the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

What are ABC tests?

ABC tests are not a new approach to IC classification, with over 20 states applying them to claims for unemployment or workers’ compensation benefits. Meanwhile, New Jersey, Massachusetts and Illinois also apply ABC tests to wage claims.Massachusetts goes one step further by altering part B, to make it more in line with contemporary work practices.

In adopting the Massachusetts test, the California Supreme Court wrote “In light of contemporary work practices, in which many employees telecommute or work from their homes, we conclude that the Massachusetts version of part B provides the alternative that is more consistent with the broad reach of the … California wage orders.” 

How this affects companies with workers in California?

The new ruling is a major knock to companies in California hoping to capitalize on the gig economy. Companies that were intending to avoid paying wages and benefits to workers they classify as ICs will now have to prove the workers are running their own businesses.Overall, many Californian businesses will now need to reevaluate their use of ICs and mold their business to comply with the new legislation -  perhaps seeking compliance solutions to help them achieve this.

The ruling highlights the growing trend towards protecting worker rights in the ever-expanding gig economy and the federal government’s increasingly employer-protective approach with their use of multi-factor tests for IC status. The ruling also emphasizes the need for solutions that can facilitate the growth of gig economy workers and the protection of workers’ rights. These solutions come in various methods including evaluation of contracts, pay rates, and deliverables.

Disclaimer: All information written here is for general informational purposes only and is not intended to be a substitute for professional and/or legal services.