How To Use The ABC Test To Classify Independent Contractors

As a business owner, you are always watching the bottom line, constantly looking for ways to become more streamlined or efficient. One of the first things you may have done to streamline your business is hire independent contractors to handle work that was previously handled by in-house employees. The California Supreme Court provided a new metric for determining whether an individual is to be considered a contractor or employee when they ruled in Dynamex Operations West, Inc. v. Superior Court of Los Angeles in 2018.

Background Of The ABC Test For Independent Contractors

In 2004, Dynamex, a national delivery and courier service provider, began to classify its drivers as independent contractors, rather than employees as it had previously done. The new classification meant that Dynamex drivers had to pay for their vehicles, transportation expenses, and uniforms. Two drivers brought a class-action lawsuit, stating that they were employees, not contractors. In the Dynamex case, the Supreme Court ruled that a worker must pass a three-part test – referred to as the A-B-C Test – to retain their status as a contractor, rather than an employee.

The ABC Test For Classifying Independent Contractors

1. A) Absence Of Control: The individual must be free from the control of the hiring company regarding the performance of the assigned task or job.
2. B) Business Nature: The worker must also perform work outside of that hiring entity’s assigned job or business
3. C) Customary Occupation: They must also have an established business of the same occupation as the work performed for the hiring company

Note For Franchisors & Similar Businesses

Dynamex’s lack of a franchise relationship within its company excluded any discussion on how the Court’s ruling would apply in a franchise situation or other less-than-clear hiring relationships. As you explore the effects of the Dynamex ruling on your franchise, it is worth noting that a California appellate court ruled in Curry v. Equilon Enterprises that the ABC test does not apply to joint employment situations.

Assembly Bill 5 Legally Codifies The Ruling In The Dynamex Case

The Dynamex case ruling prompted action from the California State Legislature, specifically Assemblywoman Lorena Gonzalez. On December 3, 2018, Gonzalez introduced Assembly Bill 5 (“AB5”) was intended to codify the Dynamex court decision. After several amendments and revisions, Assembly Bill 5 was signed into law on September 18, 2019.

Does your state follow the ABC Test or the Common Law Test?

State	Worker Classification Test
Alabama	Common law test
Alaska	ABC test
Arizona	Common law test
Arkansas	ABC test
California	ABC test
Colorado	A and C of ABC test
Connecticut	ABC test
Delaware	ABC test
District of Columbia	Common law test
Florida	Common law test
Georgia	ABC test
Hawaii	ABC test
Idaho	A and C of ABC test
Illinois	ABC test
Indiana	ABC test
Iowa	Common law test
Kansas	ABC test
Kentucky	Common law test
Louisiana	ABC test
Maine	ABC test
Maryland	ABC test
Massachusetts	ABC test
Michigan	Common law test
Minnesota	Common law test
Mississippi	Common law test
Missouri	Common law test
Montana	A and C of ABC test
Nebraska	ABC test
Nevada	ABC test
New Hampshire	ABC test
New Jersey	ABC test
New Mexico	ABC test
New York	Common law test
North Carolina	Common law test
North Dakota	Common law test
Ohio	ABC test
Oklahoma	A and B or A and C of ABC test
Oregon	ABC test
Pennsylvania	A and C of ABC test
Puerto Rico	ABC test
Rhode Island	ABC test
South Carolina	Common law test
South Dakota	Common law test
Tennessee	ABC test
Texas	Common law test
Utah	ABC test
Vermont	ABC test
Virginia	A and B or A and C of ABC test
Washington	ABC test
West Virginia	ABC test
Wisconsin	A and C of ABC test
Wyoming	A and C of ABC test

Applying the ABC Test To Your Company

As you consider streamlining your business by hiring contractors, take note of worker classification guidelines and save yourself the costs and expenses associated with misclassifying a worker.

If you need help with navigating your particular situation, contact MBS Accountancy and navigate your taxes and finances with ease!