Retroactive ABC Test

“I have two contractors that I’ve been using for quite a while. Is it true that a recent ruling might make me susceptible to a retroactive lawsuit if California doesn’t believe they are legitimate contractors?”

Your HR Survival Tip

We have seen many changes to our use of independent contractors over the past three years. California has always assumed a worker is an employee and it’s up to the company to prove otherwise. If you classify someone as a contractor and CA disagrees, it’s considered a “misclassification” with associated fines and penalties.

The standard used for many years was the Borello test that included 20 determination points, with a focus on the amount of control the company had over the contractor and their compensation. Then the CA Supreme Court introduced the ABC test in 2018 during the Dynamex case and the use of contractors was forever altered.

The ABC test focuses on classification standards under California’s wage orders. This test resulted in a very short list of acceptable uses for contractors and who qualified as a contractor. Then AB5 was passed and the door for contractors opened a bit. Proposition 22 opened the door even wider, affecting gig drivers for companies like Uber, Lyft, GrubHub, etc. Both these laws list who may qualify as a contractor but, as usual, it’s never completely black and white.

The problem areas we see in determining whether a contractor would be viewed as such by California are primarily two-fold:

  • First, is that contractor operating as a regular business? Do they have a business name, are they marketing that business, do they provide similar services to multiple clients, and are they bringing expertise to your business that you don’t have?

  • Second, is that contractor involved in your basic business operations to make your product or to service your clients? If so, they may be too involved and could be considered an employee by the state.

The most recent CA Supreme Court decision states the ABC test will likely be retroactive for all currently pending misclassification lawsuits and similar cases that will be filed in the next year or so. The simple explanation is that you need to be even more careful when hiring a contractor than ever before because the courts are locking this issue down.

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