1099: California’s New ABC Test

1099 abc test

For a worker to be properly classified as an independent contractor (sometimes called a “1099 contractor” or “1099 employee”), they must pass certain tests under federal and state law. California employers have been subject to the “ABC test” since April of 2018 because of a California Supreme Court ruling. Effective January 1, 2020, the ABC test will become part of California’s statutes as well. The primary difference between the law made by the Supreme Court ruling and the law as of January 1 is that the new statute includes certain types of workers that will not be subject to the ABC test, but instead the less strict Borello test. Both tests are described below. 

The ABC Test

To properly classify a worker as an independent contractor, the employer must be able to say “yes, this is true” to all three parts of the test. A worker may be classified as an independent contractor if:

  1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

A Explained – Free From Control
Every state and federal test currently in use for independent contractors looks at control. Most, however, ask about degree of control. The ABC test is much more definitive—it demands that the worker be free from control. The ruling does not define the exact meaning of “free,” but for now we encourage employers to take this criterion at face value. If an employer dictates how or where the work gets done or who does it, they have an employee. Likewise, although an employer may put a “when” on work by establishing a deadline, they should not dictate that the work be done on certain days or during certain hours. 

B Explained – Outside Usual Course of Business
An independent contractor must be doing work that is outside the employer’s usual course of business—that is, not essential to the offerings of the business. For example, in a restaurant, the cooks and servers do work that is in the usual course of business, whereas someone hired to design the new menu or reupholster the booths does not. The cooks and servers must always be employees, while those who do work that is not part of the business’s core offering would pass this requirement of the test.

C Explained – Worker Has an Established Business
Part C asks whether the worker is in business for themselves doing the kind of work that they are doing for the organization that has hired them. For instance, does the individual hired to design the new menu offer their graphic design skills on the open market? Do they have other paying customers, a business card, a website, their own graphic design software? Is their business registered with the state?

The focus—in inquiries from the state and in future litigation—will likely be more on whether the individual made money from other sources doing the same kind of work they offered to the employer and less on whether they had the standard business accessories. That said, the more evidence of an established business, the stronger the argument for an independent contractor.

Workers exempt from the ABC test but subject to Borello include the following:

•    Licensed insurance agents
•    Licensed physicians and surgeons, dentists, podiatrists, psychologists, and veterinarians providing services to or by a health care entity
•    Licensed lawyers, architects, engineers, private investigators, and accountants
•    Registered securities broker-dealers or investment advisers
•    Direct salespeople who are exempt from unemployment insurance
•    Real estate licensees (may be subject to tests other than Borello)
•    Commercial fishermen
•    Certain providers of professional services (see below)
•    Others performing work pursuant to a subcontract in the construction industry if certain criteria are met

Professional Services Exemption

Employees with contracts for certain professional services are subject to Borello if certain criteria are met. For purposes of worker classification, professional services are limited to the following:

  • Marketing, provided that the contracted work is original and creative in character and the result of which depends primarily on the invention, imagination, or talent of the employee or work that is an essential part of or necessarily incident to any of the contracted work.
  • Administrator of human resources, provided that the contracted work is predominantly intellectual and varied in character and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time.
  • Certain travel agent services.
  • Graphic design.
  • Grant writer.
  • Fine artist.
  • Services provided by an enrolled agent who is licensed by the United States Department of the Treasury to practice before the Internal Revenue Service pursuant to Part 10 of Subtitle A of Title 31 of the Code of Federal Regulations.
  • Payment processing agent through an independent sales organization.
  • Certain services provided by a still photographer or photojournalist.
  • Certain services provided by a freelance writer, editor, or newspaper cartoonist.
  • Services provided by a licensed esthetician, licensed electrologist, licensed manicurist, licensed barber, or licensed cosmetologist, subject to certain restrictions. 

To qualify for the professional services exemption from the ABC test, the following criteria must be met:

  • The worker maintains a business location separate from the hiring entity. Their business location may be their own home. (They are not prohibited from choosing to perform services at the location of the hiring entity.)
  • If work is performed more than six months after the effective date of this section, the worker has a business license, in addition to any required professional licenses or permits for the them to practice in their profession.
  • The worker has the ability to set or negotiate their own rates for the services performed.
  • Outside of project completion dates and reasonable business hours, the worker has the ability to set the individual’s own hours.
  • The worker is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.
  • The worker customarily and regularly exercises discretion and independent judgment in the performance of the services.

In addition, the worker must provide their services through a sole proprietorship or other business entity.

The Borello Test

In applying the economic realities test, the most significant factor to be considered 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. Additional factors that may be considered depending on the issue involved are as follows:

  1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
  2. Whether or not the work is a part of the regular business of the principal or alleged employer;
  3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
  4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
  5. Whether the service rendered requires a special skill;
  6. 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;
  7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
  8. The length of time for which the services are to be performed;
  9. The degree of permanence of the working relationship;
  10. The method of payment, whether by time or by the job; and
  11. 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. 

Other points to remember in determining whether a worker is an employee or independent contractor are that the existence of a written agreement claiming to establish an independent contractor relationship is not determinative 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. 

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Written by:

Scott Evers

Scott Evers

Vice President Sales and Marketing