Explaining the A, B, and C of the ABC Test
We get asked a lot (A LOT) of questions about AB5 and the ABC test by people who are trying to understand how those factors affect their work in the production world. Although it’s tempting to wish for a one-size-fits-all answer that magically determines whether a worker, or a group of workers, is classified as an employee or a contractor, it’s important to remember that all three parts of the ABC test must be considered when determining classification as each part must be satisfied to classify a worker as a contractor.
In this installment of Ask OOTB, we’ll be looking at a couple of questions about AB5’s “ABC test.”
Question #1: How does the hiring entity apply the A of the ABC test when determining classification of a worker?
Question #2: Can you explain the B and C of the ABC test in layperson terms?
Before we dive in, two bits of housekeeping:
Ask OOTB is an ongoing series in which we share some of the most commonly asked questions that we receive, along with relevant information that can help you better understand all things payroll. If you have a question that you would like us to tackle, please submit it to us here.
And an important note: The information provided in this article does not, and is not intended to, constitute legal, tax, or financial advice. All information, content, and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. We highly recommend that you seek the advice of an attorney or tax professional rather than relying solely on the information provided herein.
First, a quick summary of the what the ABC test is:
In 2019, California Governor Gavin Newsom signed a bill called AB5 into state law. AB5 requires the application of the “ABC test” to determine whether a worker providing services in California should be classified as an independent contractor or an employee for purposes of the Labor Code, Unemployment Insurance Code, and Industrial Welfare Commission (IWC) wage orders. It is the responsibility and complete liability of the hiring entity to determine such classification before paying a worker. The worker is unable to waive their rights and cannot sign a contract to that effect, or in any way make this determination for the hiring entity.
California law assumes that workers are employees, so the hiring entity must prove that the worker is an independent contractor in order to pay them as a contractor. The liability and penalties for misclassification lie entirely with the hiring entity.
If the answer is “No” to ANY of the following questions, a worker should be classified as an employee and must be paid W-2 wages:
A: Is the worker free from the control and direction of the hirer?
B: Will the worker perform work outside the usual course of the hirer?
C: Is the worker regularly engaged in an independently established trade of the same nature as the work to be performed?
Question #1: How does the hiring entity apply the A of the ABC test when determining classification of a worker?
The California Labor and Workforce Development Agency (LWDA) summarizes Part A of the ABC test as follows:
“Part A: 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?”
The LWDA cites the following points from the Dynamex court case (2018) in which the California Supreme Court first adopted the ABC test:
The hiring entity must establish that the worker is free of such control to satisfy part A of the ABC test.
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.
Depending on the nature of the work and overall arrangement between the parties, a business need not control the precise manner or details of the work in order to be found to have maintained the necessary control that an employer ordinarily possesses over its employees.
For example: A photographer does not need to control the precise manner in which a lead stylist preps off set or even styles on set in order to be found to have maintained necessary control over that lead stylist once they are on set and under the photographer’s creative direction.
Question #2: Can you explain the B and C of the ABC test in layperson terms?
The LWDA summarizes Part B of the ABC test as follows:
“Does the worker perform work that is outside the usual course of the hiring entity’s business?”
Essentially, this means that if you are hiring someone to assist you in your primary business activity, it is unlikely they can be considered an independent contractor.
For example: If you are running a production company for photo shoots, your models are deemed employees because they are directly involved in the production company’s primary activity of creating marketing materials. However, the catering company that you engage for the same photo shoots is a separate business that provides an ancillary service not directly related to creating marketing materials, so they can be paid as a vendor and provided a Form 1099.
The LWDA summarizes Part C of the ABC test as follows:
“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 LWDA cites the following details from Dynamex and Garcia v. Border Transportation Group, LLC (2018) to further clarify Part C:
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.
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.
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, and advertisements.
For example: If a production company is running a photo shoot that involves a car, the mechanic who works on the car is engaged in his own trade and independently established business, and can therefore be classified as an independent contractor. However, if a prop stylist is hired to style the car and they do not operate as an independent business, they would not qualify as an independent contractor under part C of the ABC test.
It is important to note that if you classify one person as a W-2 employee, anyone who has the same job description must also be classified as a W-2 employee. For example, if you have an electrician on all of your shoots who is a W-2 employee, you cannot also bring on another electrician with the same job description and classify them as an independent contractor.
The LWDA has a great AB5 FAQ page that we used for the summaries and citations noted above. It’s a great resource if you want more information on AB5 and how it might affect you.
We hope you’ve learned something useful from this installment of our Ask OOTB Series. If you have a question that you would like us to tackle in a future installment, please send it our way by submitting it here.