New Law Defines Who Is An Independent Contractor – And Who Is Not

If your business is a California corporation, you should be aware that a new law takes effect January 1, 2020 that changes the definition of who is eligible to be classified as an independent contractor.

The Legislature and the Governor has expanded and refined a rule first announced by the California Supreme Court. It’s important to note that the full effect of the law will not be automatic or realized overnight. State courts will interpret how the law applies to specific cases, with each new decision illuminating the law.

The legislature expects the measure to cause what could be millions of California workers to be reclassified as employees and to increase revenue to government coffers in the form of previously avoided payroll taxes and premiums for Workers’ Compensation, Social Security, unemployment and disability insurance.

At the heart of the law is a revised “ABC Test” that prohibits a hiring entity from classifying a worker as an independent contractor unless the hirer can establish that:

(A) The hiring entity does not control or direct the worker in performing the work in fact or under the terms of a contract.

(B) The work performed is outside the “usual course” of the hiring entity’s business.

(C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

It will be especially challenging for the best-known players in the gig economy (Uber, Grubhub) to satisfy parts B and C.

The law, however, excludes numerous types of work. Among the exceptions are licensed physicians, lawyers, engineers, accountants, and private investigators, certain marketing and human relations professionals, and licensed manicurists and barbers who can meet certain conditions.

The new law also excludes any “bona fide business-to-business contracting relationship under which a sole proprietor, partnership or other form of business that provides service to another business (i.e., an ad agency). The contracting business to which services are provided must satisfy 12 criteria to avoid application of the ABC Test (including showing that the business service provider “actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.” The business service provider can set or negotiate its own rates and set its own hours and location.

Independent contractor status of the types of work excluded will be evaluated under the California Supreme Court’s “Borello Test,” from a 1989 decision. Under the test, the hiring entity’s right to control how the work is done (Part A) is the most important factor in determining employment status. The test also recognizes whether the work is part of the regular business of the hiring entity (Part B) and whether the worker is engaged in an occupation or business distinct from that of the hiring entity (a variation of Part C).

Other factors include whether the worker provides his or her own tools and whether the work requires special skills. The hiring entity need not satisfy every part of the Borello test to establish a bone fide independent contractor relationship.

The new law exempts a large number of professionals – many are licensed. The following professions (not a complete list) will be exempt:

• Physicians, surgeons, dentists, podiatrists, veterinarians, psychologists
• Lawyers, architects, engineers
• Insurance brokers, accountants, securities broker/dealers, investment advisors
• Real estate agents
• Commercial fishermen (until 2023)
• Builders and contractors
• Marketing, human resources administrator, travel agents, graphic designers, grant writers, fine artists
• Freelance writers, photographers
• Hair stylists, barbers, estheticians, electrologists, manicurists (manicurists’ exemption ends December 2022)
• Tutors
• AAA-affiliated tow truck drivers

The new law likely will cause many industries to reclassify workers by allowing the state to enforce a stricter standard for freelancers. Here are some major ones:

• Uber, Lyft, DoorDash, Postmates, Grubhub drivers
• Drivers of heavy-duty trucks, Amazon delivery trucks, some tow trucks
• Housekeepers and janitors (commercial cleaning services)
• Health aides in nursing homes, assisted living facilities
• Newspaper carriers (starting 2021)
• Unlicensed manicurists
• Land surveyors, landscape architects, geologists
• Campaign workers
• Language interpreters
• Exotic Dancers/Adult Entertainment