Professional Occupation Exemption to ABC Test
There are a number of exemptions and exceptions to applying the ABC Test to define a working relationship as employment versus an independent contractor. Learn more about the specified professional occupation exemption.
The laws governing employee v. independent contractor in California have changed greatly from 2017-2020, with the legislature codifying the “ABC” test that was first implemented in the Dynamex decision (Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 90 “Dynamex”).
Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the putative employer proves:
(A) that 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;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Note that each of these requirements must be met in order for the presumption that a worker is an employee to be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor.
This has been essentially codified into law, with the recent passing and signing of Assembly
Bill 5. This created section 2750.3 of the Labor Code that reflects the above requirements.
Exemptions to ABC Test
There are a myriad of exemption and exceptions to applying the above rule to particular professions and industries. Specific industries, occupations, and relationships have been provided statutory relief from having to meet the above-described test. This has as much to do with history and tradition of how those occupations and industries have operated as it did with having powerful lobbyists in place to protect particular trade associations.
The specific occupation exemption is found in subsection (b) that states:
Subdivision (a) and the holding in [Dynamex] do not apply to the following occupations as defined in the paragraphs below, and instead, the determination of employee or independent contractor status for individuals in those occupations shall be governed by the California Supreme Court’s decision in [S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (“Borello”)].
Those occupations include, subject to numerous qualifiers, certain insurance agents, physicians, surgeons, dentists, podiatrists, veterinarians, lawyers, architects, engineers, private investigators, accountants, securities broker-dealers, investment advisers, direct sales salespersons and commercial fishermen.
Each occupation type had its own definition and requirement that must be met. And once met, the particular relationship then still has to meet the requirements under Borello.
The factors defined in Borello have gone by a variety of names—Multi-Factor Test, Common Law Test, Economic Realities Test, or Right-to-Control Test. The primary test is “whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed.” In addition to the primary test, the courts consider the following secondary factors:
Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
Whether or not the work is a part of the regular business of the principal or alleged employer;
Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
The alleged employee's investment in the equipment or materials required by his or her task or his or her employment of helpers;
Whether the service rendered requires a special skill;
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;
The alleged employee's opportunity for profit or loss depending on his or her managerial skill;
The length of time for which the services are to be performed;
The degree of permanence of the working relationship;
The method of payment, whether by time or by the job; and
Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive 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 v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288)
Other points to remember in determining whether a worker is an employee or independent contractor are that the existence of a written agreement purporting to establish an independent contractor relationship is not determinative (Borello, Id. at 349), and the fact that a worker is issued a 1099 form rather than a W-2 form is also not determinative with respect to independent contractor status. (Toyota Motor Sales v. Superior Court (1990) 220 Cal.App.3d 864, 877)
However, the debate does not end there. The IRS also has a chance to weigh-in on the particular relationship.
IRS 20-Factor Test
No one factor on the test is more indicative of employee status than another. If there is a high number of “yes” marks, then it will most likely indicate the presence of an employment relationship, a high number of “no” marks may or may not indicate a contractor relationship.
The important thing to remember when evaluating the status is who has the right to control the work as to when and how it is completed.
Level of instruction. If the company directs when, where, and how work is done, this control indicates a possible employment relationship.
Amount of training. Requesting workers to undergo company-provided training suggests an employment relationship since the company is directing the methods by which work is accomplished.
Degree of business integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.
Extent of personal services. Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.
Control of assistants. If a company hires, supervises, and pays a worker's assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.
Continuity of relationship. A continuous relationship between a company and a worker indicates a possible contractor arrangement can involve an ongoing relationship for multiple, sequential projects.
Flexibility of schedule. People whose hours or days of work are dictated by a company are apt to qualify as its employees.
Demands for full-time work. Full-time work gives a company control over most of a person's time, which supports a finding of an employment relationship.
Need for on-site services. Requiring someone to work on company premises— particularly if the work can be performed elsewhere—indicates a possible employment relationship.
Sequence of work. If a company requires work to be performed in specific order or sequence, this control suggests an employment relationship.
Requirements for reports. If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.
Method of payment. Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.
Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.
Provision of tools and materials. Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.
Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.
Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.
Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.
Availability to public. If a worker regularly makes services available to the general public, this supports an independent contractor determination.
Control over discharge. A company's unilateral right to discharge a worker suggests an employment relationship. In contrast, a company's ability to terminate independent contractor relationships generally depends on contract terms.
Right of termination. Most employees unilaterally can terminate their work for a company without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.
The IRS released a manual designed to provide guidance to employers on the use of the above-test. The manual simplifies and explains the 20-point test. For a copy of the manual, you can contact the IRS center nearest you.