California’s workers’ have increasingly turned to independent contracting as a main source of income and labor, creating what is now known as the “gig economy.” For the most part freelancing is beneficial to all involved: small businesses pay less overhead for work done on occasional projects and workers enjoy performing work at their own pace and discretion.
While a “side hustle” might allow someone to dabble in a new career or supplement an income, freelancing has its downside. Businesses can become addicted to cheap labor (employees expose employers to increased liability and tax and benefit contribution requirements). Independent contractors lose out on the protection of antidiscrimination laws, wage and hour, and family and medical leave laws, and they can’t access unemployment insurance and worker’s compensation.
Despite its benefits, freelancing can get old pretty quick. After weeks of working forty hours a week at desk next to an actual employee, it’s not unusual for the independent contractor to ask, “Exactly what is the definition of “employee?”
The short answer to that question is, “it depends.” Despite the best efforts of both the California courts and legislature, attempts at clarifying employment status have only gotten more confusing.
For over thirty years the California Supreme Court’s decision in S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations (Borello), (1989) 48 Cal. 3d 341 controlled the definition of “employee” for California businesses in most circumstances. In Borello , the court adopted the common law “Right to Control Test” to determine whether or not a worker was an employee or independent contractor. Essentially, this Right to Control test asks, “Does the employer have the right to control the manner and means of accomplishing the result [i.e., work ] desired?” Borello, supra , 48 Cal.3d at 350. Capturing the essence of the employer/employee relationship, courts have emphasized that under the Right to Control test, the fact that an employer retains the right to exercise such control, whether or not it uses it , is what defines an employment relationship. See Empire Star Mines Co. v. Cal. Emp. Com . (1946) 28 Cal.2d 33.
The “Right to Control” test has a host of secondary factors which must be considered, including “(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.” See, Ayala v. Antelope Valley Newspapers, Inc . 59 Cal.4 th 522. These factors, intertwined, are evaluated on a case by case basis.
In 2018 the California Supreme Court revisited Borello in the case Dynamex Operations West, Inc. v. Superior Court , (2018) 4 Cal.5th 903. The Dynamex opinion created two big changes in the way courts looked at employment relationships. First, Dynamex created the presumption that, in many cases, workers are employees, not independent contractors. Second, the court issued what is now known as the “ABC Test,” which largely replaced Borello’s “Right to Control” test. With a presumption of employment, employers were required to use the “ABC” test to show that the worker was not an employee.
Many feel the ABC test is far more likely to show an employment relationship than the “Right to Control” test. The ABC test has three parts, and each has to be satisfied. Part “A” of the test – borrowed from Borello — requires that the worker be free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact. Part “B” of the test requires that the worker performs work that is outside the usual course of the hiring entity’s business (e.g., an electrician fixing lights in a restaurant). Finally, Part “C” requires that the worker be actually engaged in an independently established trade, occupation, or business of the same nature as the work performed (i.e., did the worker have his own business license, marketing, and clients ?)
Appellate court decisions shortly after the Dynamex decision refined when and where the “ABC” test would be used. noting that “different statutory schemes have been enacted for different purposes.” Garcia v. Border Transportation Group, LLC (2019) 28 Cal.App.5 th 558, 570. Claims where the “ABC” test are used include wage order claims including claims for unpaid wages, failure to pay minimum wages, and failure to provide meal and rest breaks, failure to furnish accurate wage statements, and unfair competition claims based on these violations. Claims that don’t use the “ABC” test include wrongful termination claims, anti-discrimination claims, workers’ compensation claims, overtime and/or waiting time penalties for non-wage order workers, and UCL claims based on those violations.
Double Down on Dynamex
In 2019, California enacted Labor Code section 2750.3 (effective 2020). The stated intent of the statute was to codify the Dynamex holding. For purposes of the Labor Code, the Unemployment Insurance Code, and California’s wage orders, a worker is now presumed to be an employee, and it is the putative employer’s burden to demonstrate otherwise, using the “ABC” test.
Statutes are not borne in a vacuum, and Labor Code section 2750.3 was no different. Industries weighed in and exceptions to the use of the employee-friendly “ABC” test were carved out. As a result, Labor Code section 2750.3 is notable not just for its codification of Dynamex , but for the wide-ranging exclusions that, frankly, cover a huge portion of the state’s workforce. Those exceptions are below.
Existing Definitions Remain in Place
Where statutes specifically define the term “employee,” Labor Code Section 2750.3 won’t change things. Existing statutory definitions of employees within the Labor Code, the Unemployment Insurance Code, or in IWC orders remain in effect. These statutory provisions may include different definitions of “employee” in an effort to effectuate their purpose.
Specific Occupational Exceptions
Labor Code section 2750.3 identifies specific occupations where the determination of employee or independent contractor status is not governed by the “ABC test”, but rather by the “Right to Control” test. These include licensed insurance agents; certain licensed health care professionals; lawyers, architects, engineers, private investigators, and accountants; registered securities broker-dealers or investment advisers; certain direct sales salespersons; commercial fishermen; certain newspaper distributors.
Business and Professions Code Occupations
The holding of Dynamex also doesn’t apply to certain professions governed by California’s Business and Professions Code, including certain real estate licensees and repossession agencies.
Other professionals are also less likely to be defined as “employees”. Labor Code section 2750.3 requires that the “Right to Control” test, rather than the “ABC” test, be applied to individuals offering “professional services” to other businesses IF the hiring entity can show that six factors are satisfied. These professional services include certain marketing workers, travel agents, artists, tax preparers, writers, photographers, barbers, human resources administrators, and others.
Business to Business Relationships
Similarly, Labor Code section 2750.3 exempts from the ruling in Dynamex “bona fide business-to-business relationships” (i.e., where one business (known as the “contracting business”) hires another business (known as the “business service provider”) to provide it with services). In these circumstances, the “Right to Control” test is used to determine whether the contracting business is an employer of the business service provider, IF the business service provider is (1) formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation; and (2) twelve factors are satisfied, including control over work, the existences of licenses, whether the agreement to perform work is in writing, and whether the two entities have separate physical locations.
Under Labor Code section 2750.3, the Dynamex holding does not apply to the relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry, so long as the contractor demonstrates that eight criteria are satisfied.
Finally, under Labor Code section 2750.3, the Dynamex holding does not apply to the relationship between a referral agency (i.e., a business that connects clients with service providers that provide graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, or yard cleanup), and a service provider (i.e., a person or business who agrees to the referral agency’s contract and uses the referral agency to connect with clients), if ten criteria are met.
How Did We Get Here, and Where are We Going?
California’s employer/employee test began nearly one hundred years ago as a means of determining whether a business was responsible for the negligent acts of its workers. Since then, growing concerns over workplace safety and the state’s ability to control (and tax) its labor force have resulted in the evolution of the original right to control test. Unfortunately, more and more voices chimed in on the topic; as a result, California is now stuck with a complex myriad of tests that, while grounded in good intentions, are nearly impossible to follow. More importantly, how much do these tests really matter? Will a trier of fact become overwhelmed and default to the question of right to control ? Only time will tell. What is certain is that the process remains complicated, and California must continue to make efforts to streamline the way workplace relationships are defined.
The information in this article is not intended to, nor should it be considered to be, legal advice, nor does it create an attorney/client relationship. While this article contains a non-exhaustive discussion on recent laws or topics effecting California employees and/or employers, the laws outside of California and/or in federal court may be different than those discussed herein. Further, there is absolutely no assurance that any statement contained in this article is true, correct or precise. The law varies from place to place and it evolves over time—sometimes quite quickly. Even if a statement made herein about the law is accurate, the law may have changed, been modified or overturned by subsequent development since the entry was posted. The article is, at best, of a general nature and cannot substitute for the advice of a licensed professional who can apply it to the particular circumstances of a case. It is intended to initiate further consideration, inquiry, or consultation on the topics discussed. Please contact Urbanic & Associates, Inc. for a full evaluation of your case. In the alternative, please contact a local bar association, law society or similar association of jurists in your legal jurisdiction to obtain a referral to a competent legal professional if you do not have other means of contacting an attorney .