Are You An Employee or an Independent Contractor? A California Labor Lawyer’s Perspective (2024)

Whether you are an employee or an independent contractor depends on more than what your employment contract or offer letter says, whether you get a Form 1099 or W2 at tax time, or even what your boss tells you. The distinction is critical, as employees enjoy the benefits and protections of the California labor code (such as minimum wage, overtime, meal breaks, rest breaks, sick pay, etc.), while independent contractors do not.

The Borello Test

Previously, courts used a legal test called the “Borello test” to determine if a worker was an employee or an independent contractor. The Borello test originated from a California Supreme Court decision called S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341. The Borello test applies a complex multifactor approach, focusing primarily on the level of control that the employer has over the worker and the work performed.

The factors considered in the Borello test are:

1. Whether the worker is engaged in an occupation or business distinct from that of the alleged employer.

2. Whether or not the work is a part of the regular business of the alleged employer.

3. Whether the alleged employer or the worker supplies the instrumentalities, tools, and the place of work for the worker.

4. The worker’s investment in the equipment or materials required by his or her task or his or her employment of helpers.

5. Whether the service rendered requires a special skill.

6. The kind of occupation, and whether the work is usually done under the direction of the alleged employer or by a specialist without supervision.

7. The worker’s opportunity for profit or loss depending on his or her managerial skill.

8. The length of time for which the services are to be performed.

9. The degree of permanence of the working relationship.

10. The method of payment, whether by time or by the job.

11. Whether or not the parties believe they are creating an employer-employee relationship.

The ABC Test

In 2019, California passed a law that greatly simplified the Borello test into a 3-factor “ABC test”. Assembly Bill 5 (AB5) was signed into law by California Governor Gavin Newsom on September 18, 2019, and it went into effect on January 1, 2020. AB5 codified the ABC test, which had originally been established by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (April 2018) 4 Cal.5th 903, and expanded its application to a broader range of industries and professions in California.
The test comprises three criteria, all of which must be satisfied for a worker to be considered an independent contractor:

A) Free from Employer’s Control: The worker must operate free from the control and direction of the alleged employer in the performance of the work, both contractually and in practice. This criterion examines the degree of independence the worker has from the alleged employer’s operational control.

B) Outside Employer’s Core Business: The worker’s tasks must fall outside the usual course of the alleged employer’s business operations. For instance, if a retail store hires an electrician to repair a fixture, the electrician’s services are not part of the store’s core business activities.

C) Independently Established Business: The worker should be engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. This means the worker customarily provides their services to a broader market or is actively offering their services to other potential clients. Typically, the worker in this case would have their own corporation, business cards and even uniforms and advertising.

The adoption of the ABC test effectively turned many workers who previously would’ve been considered independent contractors under the old Borello test into employees protected by California labor laws.

Exemptions and Considerations

In light of AB5, employer groups cried foul and succeeded in introducing many exemptions to the law both during and after the passage of AB5. These exemptions from the ABC test, as provided in AB5 itself as well as in subsequent amendments and legislation, cover a wide range of professions and business relationships. For these exemptions, the determination of whether a worker is an employee or an independent contractor is assessed under the old Borello test (which is more favorable to employers), rather than the new ABC test (which is more favorable to employees). Below is a broad overview of some of the key exemptions:

  1. Licensed Professionals: This includes doctors, dentists, psychologists, veterinarians, lawyers, architects, engineers, private investigators, and accountants.
  2. Financial Services: This covers brokers, investment advisors, and other financial services professionals.
  3. Real Estate: Real estate agents and mortgage loan originators are exempt, provided they meet certain criteria.
  4. Freelance Writers and Photographers: Freelancers, such as writers, photographers, and freelance editors, have an exemption with certain conditions related to the number of submissions to a single entity.
  5. Commercial Fishermen: Commercial fishermen working in California waters are exempt, except those working on commercial passenger fishing boats.
  6. Professional Services: This category includes services such as marketing, human resources administrator, travel agents, graphic designers, grant writers, and others, under specified conditions.
  7. Contractors and Construction Trades: Certain contractual relationships in the construction industry, subject to specific requirements, including the possession of a contractor’s license, the payment of prevailing wages, or the meeting of other conditions.
  8. Referral Agencies: Referral agencies and businesses that connect clients with service providers in areas such as tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, and pet grooming, under certain conditions.
  9. Professional Services Contracts: This exemption applies to contracts for certain professional services such as marketing, human resources, travel agent services, graphic design, grant writing, fine artist, freelance writer, photographer, or photojournalist, barber or cosmetologist, esthetician, electrologist, manicurist, real estate appraiser, and landscape architect, provided the professional service provider meets certain criteria.
  10. Business-to-Business Contracting: A business service provider that contracts to provide services to another business rather than directly to customers of the contracting business is exempt if the contract meets specific criteria.
  11. Performance Artists: Musicians, musical groups, and performers for single-engagement live performances, with specific conditions.
  12. Insurance Industry: Licensed insurance agents, brokers, and other professionals in the insurance industry are exempt.

It’s important to note that the conditions and specifics of these exemptions can be complex, involving various criteria that must be met for the exemption to apply. Additionally, legislation and legal interpretations are subject to change, so it’s advisable for individuals and businesses to consult with an abogado to understand the current status of exemptions and how they might apply to specific situations.

Conclusión

Unfortunately, employers have every incentive to misclassify employees as independent contractors. It helps employers to evade payroll taxes, social security and medicare payments, workers compensation payments, unemployment insurance payments, as well as labor laws such as minimum wage, overtime, meal and rest breaks, expense reimbursement, and paid sick leave. To be blunt, misclassification saves employers a lot of money.
However, misclassification is also a form of wage theft that undermines workers’ rights and denies them critical protections and benefits. Misclassification can have broader economic consequences, too, such as reducing the tax revenue available for public services. In short, it is against the law. If you feel you are being misclassified as an independent contractor, consider discussing your situation with a Abogado laboral de California.

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