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California’s ABC Test, Dynamex, And AB-5: What Employers Need to Know

By August 13, 2021March 12th, 2023No Comments
California state building with two flags flying on a pole

Employers that engage independent contractors in California must adhere to one of the country’s strictest classification laws—the ABC test. While California put its ABC test into practice in 2018, it has undergone several updates since its introduction, leaving some employers unsure whether they’ve kept up with all the changes. 

Read on to learn more about California’s ABC test, how it’s evolved, why some companies are exempt, what other states adopt a version of the standard, and one way your company can confidently classify talent in California and beyond. 

How Did California Adopt the ABC Test?

In 2018, the California Supreme Court settled a landmark case regarding an employer that had begun classifying its talent as independent contractors rather than employees. In the case Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court established the precedent for the ABC test, a rigid new standard to determine whether a worker is an employee or an independent contractor. 

Before Dynamex, California used the Borello test to determine whether employers compliantly classified their talent. The Borello test, which was based upon a 1989 decision, set looser rules for talent classification. California used the Dynamex case to tighten the standards. 

The Dynamex case began in 2005—one year after Dynamex Operations West began classifying its drivers as independent contractors rather than employees.  

Lawyers filed a lawsuit against the company on behalf of over 1800 Dynamex drivers. The suit alleged that the drivers performed the same tasks they had when Dynamex classified them as employees and that the independent contractor classification was therefore unwarranted. 

In 2018, the California Supreme Court ruled in favor of the drivers. The decision set the standard that companies must classify their talent as employees by default—or go through the ABC test to prove that their team members are eligible to be classified as independent contractors.  

What Is the ABC Test?

California’s ABC test makes it clear that companies can classify their talent as independent contractors only if they can prove all three of the following conditions

  • That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
  • That the worker performs work that is outside the usual course of the hiring entity’s business; and
  • That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

In summary, independent contractors must be free to make their own decisions about how they work. They also must perform work that is consistent with their trade and outside the company’s regular business. 

How Does AB-5 Affect the ABC Test?

California implemented its AB-5 law in January of 2020. AB-5 formalized the ABC test introduced in the Dynamex decision while also adding some additional clarification. For example, AB-5 exempts specific occupations from the ABC test, including:

  • Insurance agents
  • Securities broker-dealers or investment advisers
  • Lawyers
  • Architects
  • Direct sales professionals
  • Commercial fishermen
  • Licensed barbers or cosmetologists
  • Certain healthcare professionals
  • Licensed realtors
  • Human resources administrators
  • Freelance writers and graphic designers

Because professionals in these fields are exempt from the ABC test, the state uses the Borello test to determine their classification status. 

AB-5’s other major update to Dynamex expands the scope of the ABC test. Under the Dynamex ruling, the ABC test only applied to wage violations, such as an employer paying below minimum wage or not issuing a final paycheck. Under AB-5, the ABC test applies to additional situations like wrongful termination and expense reimbursement.

Why Are Companies Like Uber Exempt From the ABC Test?

In November of 2020, California voters passed Proposition 22, which allowed app-based rideshare and delivery companies to classify their talent as independent contractors rather than employees—even though these workers would otherwise not meet the criteria of the ABC test.

Uber, Lyft, DoorDash, Instacart, and Postmates poured more than $200 million of funding to lobby for the proposition—and it’s easy to understand why. Under Proposition 22, companies like Uber do not have to offer their workers the benefits they would otherwise provide to employees, such as worker’s compensation and unemployment.

What Is The Most Recent Update to California’s ABC Test?

When the California Supreme Court handed down the Dynamex ruling in 2018, many companies wondered whether the test would apply retroactively. In other words, employers with cases pending at the time of the Dynamex case needed to know if the ruling would apply to them. 

The California Supreme Court settled that question in January 2021. 

In the Vazquez et al. v. Jan-Pro Franchising International case, the court affirmed that the ABC test applied to cases that were undecided when the Dynamex ruling was handed down. Essentially, this creates more challenges for employers facing legal challenges over classification at the time of Dynamex. Rather than being able to classify their talent as independent contractors under the more employer-friendly Borello test, these companies are subject to the stringent ABC test. 

Confidently Classify Talent With a Proven Partner

California is now one of 33 states that use the ABC test to determine talent classification compliance. Each state’s ABC test has its unique nuances, creating complications for employers that want to compliantly classify talent in multiple states. Velocity Global has the expertise and comprehensive service to make classification easy and accurate—no matter where you engage talent. 

Our Independent Contractor Classification solution quickly and correctly determines whether your talent is an independent contractor or employee in all 50 U.S. states. Then, depending on the classification requirements, our Agent of Record or U.S. Employer of Record solutions help you compliantly manage your independent contractors, so you mitigate misclassification risks without taking on extra burdens. 

Reach out to Velocity Global today to find out how we can help you correctly classify talent in California and beyond.