The ABC Test: Employee or independent contractor?

With the rise of the 21st-century gig economy, the line between an independent contractor and an employee is more blurred than ever. A high-profile 2018 court decision involving app-based companies like Uber, Lyft and Postmates limited the scope of whom employers could classify as contractors. The California Supreme Court’s decision was further bolstered by a September 2019 bill signed by Gov. Gavin Newsom limiting companies’ use of contractors.

Implications for workers and employers

Correctly classifying workers as either employees or independent contractors has far-reaching consequences. Recent studies show that 12.5 million people – 8.4 percent of the American workforce –are classified as independent contractors.

Independent contractors are not privy to many laws protecting workers’ rights. This includes minimum wage laws, overtime, sick leave, unemployment, workers’ compensation and protection against unemployment and harassment.

While hiring workers as independent contractors and not employees saves employers money, California says that employee misclassification costs the state $7 billion in tax revenue per year and increases workers’ dependence on social-safety-net programs.

The ABC Test

To clearly delineate who is an employee and who is a contractor, California courts and state agencies have created The ABC Test. The three-pronged test determines if a worker can, indeed, be classified as an independent contractor. The test asks the following questions:

1. The employer does not determine the “control and direction” of the workers’ performance.
2. The job the worker is doing is outside the scope of the business’ normal operations.
3. The worker is “customarily engaged in an independently established trade, occupation, or business” compared to the work being performed.

If any of these three requirements go unmet, the worker is classified as an employee.

For example, an electrician doing wiring at a bakery would be an independent contractor. An electrician is an “independently established trade” and the work being performed would likely be out of the purview of the person running the bakery.

On the other hand, if the bakery hired someone as a cake decorator, and that person was given assigned tasks and expected to show up at certain hours and fulfill certain duties, he or she would likely be classified as an employee.

While all these requirements can be confusing, it is important for business owners to correctly classifying employees. Failure to do so can result in hefty fines.