The ABC test was named such for its three-pronged definition (prongs A, B, and C) of a contractor. Here's the definition of a contractor under this law, and here are the implications.
The ABC test is a new process for identifying and categorizing independent contractors. It was named such for its three-pronged definition (prongs A, B, and C) of a contractor. According to this test, workers will only be legally categorized as contractors if they meet the following:
- That the worker 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;
- That the worker performs work that is outside the usual course of the hiring entity’s business; and
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
With this three-pronged approach, the Supreme Court is attempting to make the qualifications for contractors more stringent. You’ve heard of “innocent until proven guilty,” and this is similar ideology– “employee until proven contractor.”
What’s new about the ABC test?
The newest version of this contractor law has been updated in its second qualification– prong B. According to older variations of this test, a contractor could either:
- perform work that is outside the usual course of the hiring entity’s business OR
- perform work outside all the places of business of the hiring entity.
The ABC test law eliminated that second option, performing work outside regular places, so the only way to satisfy the B prong is by truly doing work that is outside the usual course of business.
California is the latest state to adopt the ABC contractor test, modeling it after Massachusetts’ contractor law, which is considered the strictest contractor law in the nation. While many states use the A and C prong of this test, Massachusetts, New Jersey, and California are the only states to date that strictly adhere to all three (to determine under the context of state wage laws).
What to expect next
The ABC test is estimated to have a large effect on the swiftly-growing gig economy. Uber and Lyft drivers have long been categorized as contractors, but with these new regulations, it will be more difficult for them to remain such.
Basically, many business models rely on contractor work, as contractors are typically not protected by labor laws, nor do they receive health benefits, overtime pay, or rest breaks. For these reasons, contractors are often more lucrative hires compared to full-time employees, who typically receive all of the above. In other words, they tend to save money and a lot of administrative hassle.
If you’re a new business considering relying heavily on contractor work, consider these recent changes before categorizing your employees too quickly!