BY STEPHEN MELNICK, LITTLER MENDELSON, ON MAY 1, 2018
In a groundbreaking new decision, the California Supreme Court announced a significant change in independent contractor law, adopting a modified “ABC” test for determining whether an individual is an employee under the Wage Orders.1 This new independent contractor test is modeled on Massachusetts’ independent contractor statute, which has been considered the strictest in the country.
The New Independent Contractor Test
California courts and state agencies have long applied what is known as the Borello test for determining whether a worker was an independent contractor under the Industrial Welfare Commission Wage Orders.2 This flexible, multi-factor approach looked primarily at whether the hiring entity had a “right to control” the manner in which the worker performed the contracted service, along with eight other “secondary” factors, such as whether the worker was engaged in a distinct occupation or business, the skill required in the particular occupation, and whether the worker or the hiring entity supplied the tools used to perform the work and the place where the work was performed.3
Despite the Borello test being used for decades for Wage Order cases, the California Supreme Court rejected it in favor of a more rigid three-factor approach, often called the “ABC” test. Under this new test, a person will be considered an independent contractor only if the hiring entity can prove all three of the following:
(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
(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 the work performed.
The California Supreme Court offered little guidance on these three prongs. It noted that the “A” prong (freedom from control and direction) is similar to the common-law test used in Borello, asking whether the person is free from the “type and degree of control a business typically exercises over employees.” The “B” prong (outside the usual course of the business) focuses on whether the person is “providing services to the business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor.” And the “C” prong (independent trade, occupation, or business) asks whether the person “independently has made the decision to go into business for himself or herself,” evidenced by things such as “incorporation, licensure, advertisements, [or] routine offerings to provide the services of the independent business to the public or to a number of potential customers.” While presenting limited substantive guidance, the Court did make clear that it intended this new ABC test to be stricter than the previous Borello test.
Notably, this new independent contractor test only applies to Industrial Welfare Commission Wage Orders. The California Supreme Court did not make any rulings about whether this test would also apply to other wage and hour laws, such as claims for reimbursement for business expenses, but the opinion suggests such laws will remain subject to the Borello standard.
The Narrow B Prong, and the View from Massachusetts
Many states use ABC independent contractor tests, often in their unemployment compensation statutes. The A and C prongs that the California Supreme Court announced are comparable to these other tests. However, the B prong deviates from the norm in an important way. Most B prongs allow two different ways to prove that a worker is an independent contractor: either by showing that he or she works (1) outside the usual course of the business or (2) outside all the places of business of the hiring entity. The California Supreme Court’s new test purposefully omits this second clause (i.e., “outside all the places of business”), meaning that the only way to satisfy the B prong – and, thus, the only way to be an independent contractor – is for one’s work to fall outside the usual course of the hiring entity’s business, regardless of where the work occurs.
Until now, only one other state has used such a narrow B prong – Massachusetts. Indeed, the California Supreme Court explicitly copied the Massachusetts statute in crafting this new test. Under the similar Massachusetts statute, to satisfy the B prong, the hiring entity must show that the person works in an “independent, separate, and distinct business from that of the employer.”4 Said differently, the question under the B prong is “whether the service the individual is performing is necessary to the business of the employing unit or merely incidental.”5 As a practical matter, for most companies, this narrow B prong works as a “de facto ban,” and prevents the use of independent contractors except where the person’s work has no tangible connection to the hiring entity’s business.6
There are some modest exceptions. For some transportation companies, courts have held that the Massachusetts B prong is preempted by the Federal Aviation Administration Authorization Act (FAAAA) and is therefore unenforceable.7 Some Massachusetts courts have also held that “legitimate business-to-business” relationships can qualify for independent contractor status, even if the other “business” is a sole proprietor or one-person corporation.8
It remains to be seen how California courts will apply this new independent contractor test, or if the standard or its application will be limited by federal law (like the FAAAA has limited the standard in Massachusetts when applied to certain arrangements involving motor carriers of property). Nonetheless, going forward, companies should expect that it will be more difficult to prove that an individual was classified as an independent contractor under California wage and hour laws.