In California, a law called AB5 changed the rules for determining whether a worker is an independent contractor or an employee. The new law presumes a worker is an employee, and not an independent contractor, unless the worker satisfies a strict "ABC test." However, the law does not apply to all workers, and many are exempt from the ABC test. Workers that meet an exception instead follow the less strict "Borello test."
Independent Contractors vs. Employees in California
Every worker is classified as either an independent contractor ("IC") or an employee. The distinction is important for a number of California employment laws, including those requiring:
- minimum wage
- overtime pay
- unemployment insurance
- workers' compensation, and
- paid family leave.
Overall, compared to ICs, employees are entitled to more benefits and protections under California employment laws. For more information see Employees vs. Independent Contractors.
California's ABC Test
Unless a worker meets one of the AB5 exceptions, employers must follow the ABC test to determine if the individual is an independent contractor or employee. Under this test, a worker is considered to be an employee unless all of the following are true:
1. The worker is free from the control and direction of the hiring organization in connection with the performance of the work.
2. The worker performs work that is outside the hiring entity's business.
3. The worker is routinely doing work in an independently established trade, occupation, or business that is the same as the work being requested and performed.
Many job categories are excluded from the strict ABC test in California. Moreover, following many complaints by businesses and ICs, AB5 was amended by the California Legislature (AB2257) to add more exemptions and expand existing exemptions.
Workers in these exempt categories are not automatically ICs. Instead, almost all such workers are required to pass muster as ICs under the Borello test, the test in effect before AB5 was enacted. But, it is much easier for these workers to qualify as ICs than it would be under the ABC test.
Workers Must Pass Borello Test
Except for app-based drivers, real estate salespeople, and repossessors, workers in all the exempt categories must pass the Borello test to be classified as ICs. The Borello test (based on the California Supreme Court's decision in Borello vs. Dept. of Industrial Relations) is similar to the right of control test used by the IRS. It's not nearly as strict as the ABC test.
Under the Borello test, the most significant factor is whether the hiring firm has control or the right to control the worker both as to the work done and the manner and means in which it is performed. In addition, the hiring firm must consider the following factors:
- whether the worker is engaged in an occupation or business that is distinct from that of the hiring firm
- whether the work is part of the hiring firm's regular business
- whether the hiring firm or the worker supplies the equipment, tools, and the place for the person doing the work
- the worker's financial investment in the equipment or materials required to perform the work
- the skill required in the particular occupation
- the kind of occupation—whether, in the locality, the work is usually done under the hiring firm's direction or by a specialist without supervision
- the worker's opportunity for profit or loss depending on his or her own managerial skill
- how long the services are to be performed
- the degree of permanence of the working relationship
- the payment method, whether by time or by the job, and
- whether the parties believe they are creating an employer/employee relationship.
No single factor in the Borello test is determinative, the first one—whether the individual's work is the service or product that is the company's primary business—is given the most weight.
Workers Subject to the Borello Test
Workers in the following categories need to satisfy only the Borello test to be ICs:
- physicians, surgeons, dentists, podiatrists, psychologists, veterinarians
- insurance brokers, underwriters, premium auditors, risk managers
- architects, landscape architects, and engineers
- private investigators
- registered securities broker-dealers and investment advisers
- direct sales salespeople (must not be paid by the hour and have written IC contracts)
- manufactured housing salespersons
- individuals engaged by an international exchange visitor program recognized by the U.S. Department of State, and
- competition judges, including amateur umpires and referees.
Workers in these categories must have all required professional or occupational licenses.
Workers Providing Professional Services
Workers providing various types of professional services are ICs if they pass the Borello test—plus satisfy the following additional six factors. They must:
- maintain a business location separate from the hiring firm—this may include their residence
- have a business license, in addition to any required professional licenses or permits
- be able to set or negotiate their own rates for the services performed
- be able to set their own hours
- (a) be customarily engaged in the same type of work under contract with another hiring firm, or (b) hold themselves out to other potential customers as available to perform the same type of work, and
- customarily and regularly exercise discretion and independent judgment performing their services.
The professional services exception applies to the following workers:
- marketing professionals
- travel agents
- human resources administrators
- graphic designers
- grant writers
- fine artists
- enrolled agents
- professional foresters
- home inspectors
- payment processing agents through independent sales organizations
- digital content aggregators for still photographers, photojournalists, videographers, and photo editors, and
- a specialized performer hired by a performing arts company or organization to teach a master class for no more than one week.
Freelance Writers and Editors
Freelance writers and editors qualify as ICs only if they meet additional requirements. The exception covers freelance writers, editors, translators, copy editors, illustrators, newspaper cartoonists, still photographers, photojournalists, videographers, and photo editors who:
- work under a written contract that specifies the rate and time of pay
- do not directly replace an employee who performed the same work at the same volume for the hiring entity, and
- do not primarily perform the work at the hiring entity's business location (this exclusion is not applicable to still photographers, photojournalists, videographers, or photo editors who work on motion pictures).
In addition, individuals who provide content for a journal, book, periodical, evaluation, other publication, or educational, academic, or instructional work in any format or media qualify as ICs, provided that:
- they work under a written contract specifying the rate and time of pay and intellectual property rights
- their services do not directly replace an employee who performed the same work at the same volume for the hiring entity, and
- they do not primarily perform the work at the hiring firm's business location.
Licensed Barbers, Electrologists, Cosmetologists, and Estheticians
Licensed barbers, electrologists, cosmetologists, and estheticians also qualify as ICs under this exception if they meet the above requirements and also:
- set their own rates, process their own payments, and are paid directly by clients
- set their own hours of work and have sole discretion to decide the number of clients and which clients they provide services for
- have their own book of business and schedule their own appointments
- maintain their own business license for the services offered to clients, and
- issue a Form 1099 to the salon or business owner from which they rent their business space.
Business service providers involved in a bona fide business-to-business contracting relationship are ICs if (1) they pass the Borello test, and (2) they satisfy the following criteria. The business service provider (worker) may be considered an IC if the worker:
- is free from the hiring firm's control and direction while performing the work
- provides services directly to the contracting business rather than to customers of the contracting business
- has a written contract specifying the payment amount, services to be performed, and due date
- has all required business licenses or business tax registration
- maintains a business location separate from the business or work location of the hiring firm
- is customarily engaged in an independently established business of the same nature as that involved in the work performed
- can contract with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring firm
- advertises and holds itself out to the public as available to provide the same or similar services
- consistent with the work involved, provides its own tools, vehicles, and equipment to perform the services
- can negotiate its own rates
- consistent with the nature of the work, can set its own hours and location of work, and
- is not performing the type of work for which a license from the Contractor's State License Board is required.
Unlike the other exemptions, this exception is not limited to workers performing specific types of services. It applies to individuals who conduct business as sole proprietors, partners in partnerships, members of limited liability companies, or corporations.
Single Engagement Events
The ABC test in California does not apply to individuals such as DJs, caterers, or musicians who provide services at a single location event--this is a stand-alone non-recurring event or a series of events in the same location no more than once a week. For this exception to apply, the individual must:
- not work under the hiring firm's control
- have a written contract specifying payment
- have a separate work location (which can include a residence)
- provide his or her own tools, vehicles, and equipment
- have any required licenses, and
- be able to contract with other businesses to provide the same services.
The exception does not apply to janitorial, delivery, courier, transportation, trucking, agricultural labor, retail, logging, in-home care, or construction services other than minor home repair.
Construction industry subcontractors are exempt from the ABC test in California. They qualify as ICs if they pass the Borello test and satisfy the following criteria:
- the subcontract is in writing
- the subcontractor is licensed by the Contractors State License Board and the work is within the scope of that license
- the subcontractor has all required business licenses or business tax registration
- the subcontractor maintains a business location separate from the business or work location of the contractor
- the subcontractor has the authority to hire and fire other persons to provide or to assist in providing the services
- the subcontractor assumes financial responsibility for errors or omissions in labor or services by having insurance, legally authorized indemnity obligations, performance bonds, or warranties for the labor or services provided
- the subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed
- the subcontractor has the right to control how the work is performed, and
- the subcontractor's IC status is bona fide and not a subterfuge to avoid employee status.
Real Estate Licensees
Licensed real estate salespeople and real estate brokers are not subject to the ABC test in California. For purposes other than unemployment and worker's compensation insurance they must satisfy the Borello test to be ICs. For unemployment purposes, they are ICs if they:
- are duly licensed
- are paid based on sales, and
- have a written IC agreement.
AB5 makes an exception for most workers involved in creating, marketing, promoting, or distributing music, including:
- recording artists
- songwriters, lyricists, composers, and proofers
- managers of recording artists
- record producers and directors
- musical engineers and mixers
- musicians engaged in the creation of sound recordings
- photographers working on recording photo shoots, album covers, and other press and publicity purposes
- independent radio promoters, and
- any other individual engaged to render any creative, production, marketing, or independent music publicist services related to the creation, marketing, promotion, or distribution of sound recordings or musical compositions.
See California Labor Code Section 2780 for details.
Businesses that Obtain Work Through Referral Agencies
Certain referral agencies in the following industries are not subject to the ABC test:
- graphic design
- event planning
- minor home repair
- home cleaning
- furniture assembly
- animal services
- dog walking
- dog grooming
- web design
- picture hanging
- pool cleaning
- yard cleanup services, and
- interpreting services.
To qualify as a referral agency, the business and the worker must meet the following eleven factors:
- The worker must be free from the control and direction of the referral agency while working for the client.
- The worker must have all required business licenses or business tax registration.
- If the work for the client requires the worker to hold a state contractor's license, the worker must have the required contractor's license.
- The worker must certify to the referral agency that they have the appropriate professional license, permit, certification, or registration for the work being performed for the client.
- The worker must deliver services to the client under the worker's name, rather than under the name of the referral agency.
- The worker or the worker's business must provide its own tools and supplies to perform the services.
- The worker must be customarily engaged in an independently established business of the same nature as that involved in the work performed for the client.
- The worker must maintain a clientele without any restrictions from the referral agency and the worker is free to seek work elsewhere, including through a competing agency.
- The worker must be able to set their own hours and terms of work and is free to accept or reject clients and contracts.
- The worker must be free to set their own rates for services performed, without deduction by the referral agency.
- The referral agency must not penalize the worker for rejecting clients or contracts.
App-Based Rideshare and Delivery Drivers
As a result of the passage of Proposition 22, app-based rideshare and delivery drivers may be classified as independent contractors by rideshare and delivery network companies such as Uber and Lyft without regard to the ABC test or the Borello test. For the drivers to qualify as ICs, the network company may not:
- unilaterally prescribe specific dates, times of day, or a minimum number of hours the app-based driver must work
- require the driver to accept any specific rideshare service or delivery service request
- restrict the driver from performing rideshare services or delivery services for other network companies except during engaged time, or
- restrict the driver from working in any other lawful occupation or business.
In addition, the network companies must provide the drivers with various benefits and protections, including:
- a healthcare subsidy consistent with the average contributions required under the Affordable Care Act
- a minimum earnings guarantee equal to 120% of the minimum wage
- compensation for vehicle expenses
- occupational accident insurance to cover on-the-job injuries, and
- protection against discrimination and sexual harassment.
Other exceptions to the ABC test in California are provided for:
- data aggregators who perform paid surveys or market research
- commercial fishermen on American vessels (exception ends on January 1, 2023)
- licensed repossession agencies, and
- individuals providing driving services for motor clubs.
When to Hire an Attorney
It's important for businesses to understand and follow AB5. If you misclassify an employee as an independent contractor, you could face penalties, including wage violations and civil fines. However, the law is complex and changing. If you're not sure how to apply the law to your business, you might want to reach out to a lawyer for advice.