Independent Contractors vs. Employees: Key Differences Under California Law and Why It Matters

Under California law, a person paid to provide labor or services is an employee, unless they meet all three of the following conditions:

(A) The person 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) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

             A classic example used to illustrate the “ABC test”¹ above is the example of a plumber. If a plumber that works on their own is hired by a law firm to fix a broken pipe, that plumber is not an employee of the law firm. The law firm will not tell the plumber how they must fix the pipe, as long as the plumber does it well. The plumber is not performing work that is usually done by a law firm, as a law firm does not perform pluming work. The plumber is performing work that is part of their own existing plumbing business. The law firm may have heard of the plumber through the plumber’s ads or business cards. Thus, the plumber in this example meets the test above and is an independent contractor.

             However, if that same plumber is hired by a plumbing company, then that plumber may be an employee of the plumbing company. The plumbing company may tell the plumber during which times they must be available, what types of materials to use, and even what uniform to wear while they work. The plumber is also performing work that is part of the plumbing company’s usual course of business. The plumber is performing work for the business and not for themselves. In this example, the plumber is an employee because the three requirements in the ABC test were not met.

Why does it matter?

Misclassification deprives workers of their fundamental rights.

Independent contractors are not subject to the same wage and hour laws as employees. For example, independent contractors are not guaranteed a minimum wage, overtime, or meal and rest periods. Similarly, independent contractors do not have the right to a workplace that is free from harassment and discrimination. Nor do independent contractors have the right to a safe workplace, or to form a union.

Independent contractors also generally do not qualify for workers’ compensation if they get hurt on the job, or unemployment insurance if they get laid off.

Misclassification harms women and people of color.

The industries where misclassification is most common—construction, home health care, shipping and delivery, driver services (like Uber and Lyft), and janitorial services—are also the industries in which women and people of color are disproportionately represented. According to one study, seven out of eight occupations in which misclassification is common are held mainly by women and people of color.²

Misclassification shifts the burden to state and local governments.

When companies convert employees into independent contractors, they drastically reduce the amount of money that they have to pay by way of employment-based taxes. For example, employers are required to pay taxes that help to fund Social Security and Medicare. They also have to help pay for unemployment insurance and workers compensation. According to the Economic Policy Institute, these taxes and benefits “can add as much as 30% or more to a worker’s total costs.”³ Companies that utilize independent contractors do not pay into the social safety net in this same manner. As a result, they effectively shift the cost of these important benefit programs to the taxpayers.

Misclassification can have a ripple effect.

Misclassification makes it harder for companies that want to do the right thing and pay their employees a living wage. When a company misclassifies an employee as an independent contractor, it gains an unfair advantage over its competitors. Even though it is illegal to do so, those companies are able to slash their overhead. This forces the companies competing with them to also reduce their costs. As a result, misclassification effectively pressures other businesses to follow suit.

Footnotes:

1. The “ABC test” was established by Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903 and codified into law by AB5 in 2019. ↩︎
2. See Alexander, Misclassification and Antidiscrimination: An Empirical Analysis (2017) Minn. Law Rev. 907, 910. ↩︎
3. See Economic Policy Institute, Rhinehart, et al., Misclassification, the ABC test, and employee status: The California experience and its relevance to current policy debates (June 16, 2021). ↩︎

Get in touch:

If you have questions about whether you are an employee or independent contractor, feel free to contact Hunter Pyle Law for a free, confidential consultation by calling (510)-444-4400 or emailing inquire@hunterpylelaw.com.