The California Supreme Court recently made a decision regarding who is an employee and who is an independent contractor. Because of this ruling, the default position now is that everyone (current and future hires) is an employee.  The hiring business will bear the burden of proof that each of the following factors are true to support its independent contractor classification under the “ABC Test” that the ruling put forth.

The “ABC Test” is as follows:

A)      The worker is free from the control and direction of the hiring business in connection with

the performance of the work, both under the contract for performance of the work and in fact.

B)      The worker performs work that 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 the work being performed.

The key to this three-step test is the second one, which severely restricts businesses from hiring workers as independent contractors because it precludes the hiring of a contractor in any “role comparable to that of an employee”. The Court offered two examples to illustrate this issue:

1)      A retailer that contracts with an outside plumber or electrician to perform such plumbing or electrical services would not be seen as providing services “comparable” to an employee.

2)      However, a clothing manufacturer that contracts with a work-at-home seamstress to make dresses from cloth and patterns supplied by the company (and later sold by the company) would be seen as providing services “comparable” to an employee.

The first example is the only one that will satisfy the new “ABC Test” for independent contractor.

As you can see, this is a significant change to the prior 15 step process for determining who is an independent contractor. It is our recommendation that if you are using any independent contractors that you should immediately review their status by using this new “ABC Test” with your qualified legal counsel to determine whether their classification as an independent contractor complies with the new standard and assess the risk of any future classification. The penalties for misclassifying someone as an independent contractor will include back employer payroll taxes, minimum wage and overtime issues that are unpaid, along with penalties and interest, etc. It could also impact employee benefits, pension plan census and employer responsibilities for contributions to those plans.