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Updates Have Been Made to The Guidelines for Determining Worker Classification in California

Retroactive Application of The ABC Test

On April 30th, 2018, The California Supreme Court introduced the ABC test which requires companies to meet three specific criteria to classify workers as independent contractors for purposes of the California wage orders. The test was then reaffirmed through Assembly Bill (AB) 5 on January 1st, 2020.

The test states that a worker is generally considered to be an employee unless the employer can prove:

  1. The worker was under control and direction of their performance of the work in question.
  2. The work in questions performed by the worker was not in the company’s usual course of business.
  3. The worker was regularly involved in an independent trade, occupation, or business.

Typically, the ABC test resulted in categorizing most workers as employees rather than independent contractors.

Assembly Bill (AB) 5 went into effect in January of 2020 and reaffirmed the use of the ABC test to determine whether an employee should be classified as an independent contractor or a regular employee. Under this bill, if a worker was determined to be an employee, they were then required to have access to basic labor and employment protections and benefits often denied to contract employees.

Then, on January 14th, 2021, the California Supreme Court decided that the ABC test should apply retroactively. This came as a response to the case Gerardo Vazquez v. Jan-Pro Franchising International, Inc., in which the question of extending the test retroactively was referred to the California Supreme Court by the U.S. Court of Appeals for the Ninth Circuit, where the Vazquez case is still pending.

The court concluded that the test can be applied retroactively because it did not overrule any prior decision made by the California Supreme Court nor does it disapprove any prior decision made by the California Court of Appeals.

AB 5 had originally included exemptions for certain occupations and service providers from having to strictly use the ABC test and made them subject to a multi-factor test instead. This alternative multi-factor test aims to determine a worker’s classification through many considerations including whether the worker is engaged in an occupation that is distinct from the company, whether the worker supplies their own equipment, tools to perform their work, the degree of permanence to the working relationship, and if payments to the worker are by time or by job.

Assembly Bill 2257

Effective September 4, 2020, new Assembly Bill 2257 amended AB 5 in an effort to clarify and in some cases, expand the industry-specific exemptions subject to the multi-factor test instead of the ABC test.

Some of the clarifications include but are not limited to:

• Clarifying AB 5’s Business-to-Business exemption

Under AB 5 an exemption to the ABC test was made for “bona fide business-to-business relationships” AB 2257 has clarified:

– This now applies to individuals acting as sole proprietors, public agencies, or quasi-public corporations that has retained a contractor and individuals who contract with one another for single-engagement events.

– Businesses that are contracted to provide services to other businesses’ customers can use this exemption if their employees are the ones performing the services AND they regularly contract with other businesses.

• Clarifying the exemptions of writers, photographers, artists & journalists

– It removes the limitation of the number of work requests for them, before triggering the need to be classified as employees.

– Expands occupations to be exempt from the ABC test to include:

  • Songwriters
  • Performance artists
  • Those involved in creating, promoting, marketing, or distributing sound recordings/musical compositions.
  • Freelance writers
  • Translators
  • Editors
  • Copy editors
  • Lyricists
  • Producers
  • And more

Additional exemptions have been made under AB 2257 for various other industries and professions.

Proposition 22

In California, Proposition 22 passed on November 3rd, 2020, and creates an exemption from the ABC test for app-based rideshare and delivery drivers. It preserves app-based drivers as independent contractors as long as certain criteria is met. Qualified employers and employees are then exempt from any conflicting provisions of the California Labor Code, Unemployment code, and the California wage orders.

Given these shifts to the worker-classification landscape, employers in California are encouraged to consider reviewing their current practices for worker classifications to ensure they are remaining compliant.

Is there anything Payroll Systems can help you with as you accommodate rapid legislation changes? Reach out and talk to us about the easy-to-scale solutions you need for your business.

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.