Independent Contractor or Employee? Why It Matters

The bottom line is that if you misclassify an employee as an independent contractor,
your business can face time-consuming audits, expensive fines, harmful media
coverage, and damage to your reputation. Employees are entitled to health care,
unemployment insurance, overtime pay, workers’ compensation, minimum wage,
and other benefits that are not entitled by independent contractors.

To address the problem of worker misclassification, more than 20 states have
adopted what is known as the ABC test for determining whether an individual is an
employee or an independent contractor.

What is the ABC test?

The ABC test got its name from the three parts of the test—parts (A), (B), and (C). The
test establishes a presumption that an individual performing services for an
employer is an employee, not an independent contractor unless the employer can
establish three factors:

(A) The work is done without the direction and control of the employer.
(B) The work is performed outside the usual course of the employer’s business.
(C) The work is done by someone who has their own, independent business or trade
doing that kind of work.

The burden of proof that a worker is a contractor is on your company. You need to
demonstrate that an individual is truly an independent contractor. Prior to relevant
legislation, the burden of proof was on the worker.

ABCD is for California and Dyamex

Legal battles between workers and companies have existed for years. However, in
2018 the California Supreme Court decided on a landmark case impacting worker
classification. Drivers for the same-day delivery company, Dynamex, claimed that
the company purposefully classified the drivers as independent contractors to deny
them wage protection and benefits. The court ruled on behalf of the drivers and
shifted the future burden of proof onto the hiring entity vs. the individual workers.


The Dynamex decision inspired public debate and legislative action. In 2019, the
California Legislature passed Assembly Bill 5 (AB5). The law codified the ABC test
and addressed various Labor Code provisions.

AB5 took effect on January 1, 2020, and was aimed at companies that classified a
large part of their workforce as independent contractors, also known as “gig
workers.” Many people thought this bill would mean that app-based drivers would
legally be reclassified as “employees” and entitled to health care, unemployment
insurance, overtime pay, workers’ compensation, minimum wage, and other benefits
that they were not entitled to as independent contractors.

Gig economy platforms like Uber, Lyft, and Doordash, whose business model
depends on the classification of workers as independent contractors, opposed the
decision and the legislation. A coalition of companies spent over $100 million to
secure a California ballot initiative, Proposition 22, to overturn the legislation for
drivers and delivery people. California voters were definitive in their support of Proposition 22, and app-based rideshare and delivery companies are permitted to
hire drivers as independent contractors if various conditions are met.

Exemptions to the ABC test have expanded into some other states and professions,
including but not limited to accountants, lawyers, graphic designers, and more.
Experts expect corporate groups to request Supreme Court reviews of these laws, so
stay tuned.

Drive Your Business Forward

Even if you are not based in California or hire drivers, the IRS is keen to ensure that
your business correctly classifies your employees. Working with an Employer of
Record (EOR) helps you comply with these laws and a plethora of other labor laws.
Reach out to Strategic Contracting Services today.