Misclassified As An Independent Contractor

Misclassified as an independent contractor?

Misclassifications occurs when an employer incorrectly classify workers who are employees as independent contractors. Employers often do this, so they do not have to pay payroll taxes, minimum wage, overtime, or comply with other wage and hour law requirements including but not limited to, providing meal and rest breaks. Additionally, a misclassified worker is not covered by workers’ compensation in the event the worker is injured on the job.

ABC Test

To determine whether you have been misclassified, the courts perform the ABC Test. Under the ABC test, a worker is considered an employee and not an independent contractor, unless the employer satisfies all three on the following conditions:

1. The worker is 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;
2. The worker performs work that is outside the usual course of the hiring entity’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

While the ABC test is the applicable test for most workers, for some occupations and industries Labor Code sections 2775 et seq. apply the Borello multifactor test. For some occupations, the Borello test applies without further requirements. However, for other occupations and industries, the Borello test applies instead of the ABC test only after the hiring entity satisfies other requirements first. Finally, for certain real estate licensees and repossession agencies, standards under the California Business and Professions Code will continue to apply.

Occupations where the Borello test applies instead of the ABC test under Labor Code sections 2775 et seq.:

• Certain occupations in connection with creating, marketing, promoting, or distributing sound recordings or musical compositions
• Certain licensed insurance agents, brokers, and persons who provide underwriting inspections, premium audits, risk management, claims adjusting, third-party administration consistent with use of the term “third-party administrator,” as defined in subdivision (cc) of Section 10112.1 of Title 8 of the California Code of Regulations, or loss control work for the insurance and financial service industries
• Certain licensed physicians, surgeons, dentists, podiatrists, psychologists, or veterinarians
• Certain licensed attorneys, architects, landscape architects, engineers, private investigators and accountants
• Certain registered securities broker-dealers or investment advisers or their agents and representatives
• Certain direct salespersons
• Certain manufactured housing salespersons
• Certain licensed commercial fishers (only through December 31, 2022 unless extended by the Legislature)
• Certain newspaper distributors or carriers (only through December 31, 2024 unless extended by the Legislature)
• Certain persons engaged by an international exchange visitor program
• Certain competition judges
• Certain home inspectors, as defined in Section 7195 of the Business and Professions Code, and subject to the provisions of Chapter 9.3 (commencing with Section 7195) of Division 3 of that code.

ABC Test Explained

Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?

• Courts have established that a worker who is subject, either as a matter of contractual right or in actual practice, to the type and degree of control a business typically exercises over employees would be considered an employee.

Does the worker perform work that is outside the usual course of the hiring entity’s business?

• The hiring entity must establish that the worker performs work that is outside the usual course of its business in order to satisfy part B of the ABC test. (Dynamex, 4 Cal.5th at 959.)
• Contracted workers who provide services in a role comparable to that of an existing employee will likely be viewed as working in the usual course of the hiring entity’s business. (Id.)
• Examples where services are not part of the hiring entity’s usual course of business:
  • When a retail store hires an outside plumber to repair a leak in a bathroom on its premises.
  • When a retail store hires an outside electrician to install a new electrical line. (Id.)
• Examples where services are part of the hiring entity’s usual course of business:
  • When a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company.
  • When a bakery hires cake decorators to work on a regular basis on its custom-designed cakes. ( at 959-960.)

Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

• The hiring entity must prove that the worker is customarily and currently engaged in an independently established trade, occupation, or business. (Dynamex, 4 Cal.5th at 963.)
• The hiring entity cannot unilaterally determine a worker’s status simply by assigning the worker the label “independent contractor” or by requiring the worker, as a condition of hiring, to enter into a contract that designates the worker an independent contractor. (Dynamex, 4 Cal.5th at 962.)
• Part C requires that the independent business operation actually be in existence at the time the work is performed. The fact that it could come into existence in the future is not sufficient. (See Garcia v. Border Transportation Group, LLC (2018) 28 Cal.App.5th 558, 574.)
• An individual who independently has made the decision to go into business generally takes the usual steps to establish and promote that independent business. Examples of this include:
  • Incorporation, licensure, advertisements;
  • Routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like. (Dynamex, 4 Cal.5th at 962.)
• If an individual’s work relies on a single employer, Part C is not met. For example, Part C was not satisfied where a taxi driver was required to hold a municipal permit that may only be used while that driver is employed by a specific taxi company. (See Garcia, 28 Cal.App.5th at 575.)

Borello Test Explained

The California Supreme Court established the Borello test in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341. The test relies upon multiple factors to make that determination, including whether the potential employer has all necessary control over the manner and means of accomplishing the result desired, although such control need not be direct, actually exercised or detailed. This factor, which is not dispositive, must be considered along with other factors, which include:

1. Whether the worker performing services holds themselves out as being engaged in an occupation or business distinct from that of the employer;
2. Whether the work is a regular or integral part of the employer’s business;
3. Whether the employer or the worker supplies the instrumentalities, tools, and the place for the worker doing the work;
4. Whether the worker has invested in the business, such as in the equipment or materials required by their task;
5. Whether the service provided requires a special skill;
6. The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision;
7. The worker’s opportunity for profit or loss depending on their 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 the worker hires their own employees;
12. Whether the employer has a right to fire at will or whether a termination gives rise to an action for breach of contract; and
13. Whether or not the worker and the potential employer believe they are creating an employer-employee relationship (this may be relevant, but the legal determination of employment status is not based on whether the parties believe they have an employer-employee relationship).

Borello is referred to as a “multifactor” test because it requires consideration of all potentially relevant facts – no single factor controls the determination. Courts have emphasized different factors in the multifactor test depending on the circumstances. For example, where the employer does not control the work details, an employer-employee relationship may be found if (1) the employer retains control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative, Inc. v. Workers’ Compensation Appeals Board (1991) 226 Cal.App.3d 1288.)

As the Supreme Court has explained, Borello “emphasizes statutory purpose as the touchstone for deciding whether a particular category of workers should be considered employees rather than independent contractors for purposes of social welfare legislation.” (Dynamex, 4 Cal.5th at 935.) The emphasis on statutory purpose “sets apart the Borello test for distinguishing employees from independent contractors from the [common law] standard . . . in which the control of details factor is given considerable weight.” (Id.)