When it Comes to Independent Contractors, Know Your ABCs

Within the past few years, the “ABC test” for classifying workers as employees or independent contractors has raised the stakes for companies that do business in some of the country’s largest and most important jurisdictions.  Versions of this test are used for certain types of workers in California, New York, New Jersey, and Illinois, among other states. 

And, even if your company does not operate in a jurisdiction where the ABC test is applied today, that may change.  As the gig economy continues to grow and more Americans find jobs doing freelance work, legislatures and courts will need to modernize their classification tests to draw clear lines between employees and independent contractors.

California has been on the front lines of addressing worker classification in the modern economy. We have written in the past about California’s adoption of the ABC test, as well as the importance of understanding that a state law providing more protection to workers (such as the ABC test) will trump federal protections.  California has since codified the ABC test for most classification purposes.  However, many questions about whether and how the test applies remain unanswered.

In recent months, the California Supreme Court has been petitioned in three separate cases asking if the ABC test governs the question whether an entity is a joint employer.  How the Court answers this question (and assuming it does, but more on that later) will influence courts in other jurisdictions, as well as state legislatures around the country.

So, what is the ABC test?

As a quick refresher, the ABC test says that a worker can be an independent contractor only if he or she:

A) 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 such work and in fact;

B) Performs work that is outside the usual course of the hiring entity’s business; and

C) Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The question before the California Supreme Court is whether the ABC test should be used to decide if a company that is not a direct employer of certain workers nevertheless exercises enough “control and direction” over those workers for them to be “employees.”  If the Court decides that the ABC test applies, a wide range of companies that use particular business models (like franchises) or contract with other companies to provide workers could be considered joint employers.  As joint employers, such entities could be responsible for unpaid wages under state law, among other liabilities.

Despite the importance of this central question, the Court could also choose to reject the petitions altogether.  There is no requirement for the Court to accept a petition and issue a decision, and it may decide that other courts should sort out the answer. 

Either way, the Court’s action (or inaction) will constitute another data point for other states looking at whether the ABC test is the right approach to classifying workers in today’s economy.