What the ABC Test Means for the Gig Economy: An Interview with Alan Benson

The California Supreme Court, on April 30, issued a ruling to adopt a standard, called the “ABC test,” to determine whether a worker is an employee or an independent contractor.

The ABC test has three requirements to prove workers are contractors

1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
2. The worker performs work that is outside the usual course of the hiring entity’s business (an electrician at a software company, for example);
3. The worker is customarily engaged in an independently established trade occupation or business of the same nature as the work performed.

Alan Benson, assistant professor in the department of work and organizations at the Carlson School of Management at the University of Minnesota weighs in on what the ruling may mean for employers, contractors and employees.

An Interview with Alan Benson

What does this ruling by the California Supreme Court mean?

The United States, like many countries, requires companies to provide some basic protections for employees. For example, employers are required to pay nonexempt employees a minimum wage, overtime if they work more than 40 hours per week, and (sometimes) offer statutory benefits. To cut costs and promote flexibility, some companies try to avoid these laws by classifying workers as independent contractors; since they’re not employees, laws that typically protect employees won’t apply.

Savvy employers can try to tweak their relationship with workers so that they can be labeled contractors, but since there’s a hodgepodge of federal and state definitions for determining contractor status, this can be hard. California, like the federal government’s Department of Labor and IRS, had a multifactor test, meaning there are lots of rules of thumb for distinguishing employees versus contractors. California’s “ABC test” is notable because it requires workers to satisfy all three of the criteria to be considered a contractor, rather than, for example, two of the three. This suggests more people will be labeled as employees.

What do you think this court ruling and the classification test could mean for the “gig economy” and contract workers?

Right now, most federal and state laws aren’t ready for the “gig economy,” which is growing rapidly as technology makes it simple to connect clients with contract workers for very brief engagements. Technology companies like Uber and DoorDash would like to continue labeling drivers as contractors so that they’re not entitled wages or overtime. California could have tried to make laws more flexible by relaxing the definition of a contractor, but instead, they adopted a definition that will put more workers under the protection of employment laws.

Is this a common issue with contract companies/those with gig workers?

Many companies have struggled with classification issues, for example, because they label someone a contractor but then start to blur the lines between how they treat them. Under the “ABC test,” companies are more likely to get in trouble if they start directing workers how to do their work or use them for a long period of time.

Who does this ruling impact?

In some sense, this ruling impacts everyone. It impacts California companies because they will be particularly careful to meet each of the three requirements of contractors. It impacts California contractors and employees, who may be reclassified and see their work arrangements and benefits change. It impacts other states that look to California for how to manage changing work relationships.

What potential implications do you feel this could have over the next five years?

The next five years, I suspect most companies will be in the “wait and see” mode. Most companies that are already cognizant of their contractors’ status are probably already thinking about each of the three prongs of the “ABC test,” and so this could lead them to make sure that they’re compliant in each of the three areas, rather than just overall.

Are there other similar tests or court cases anywhere else in the country?  

I don’t know about other cases. However, at the federal level, there is much discussion over whether we need to change labor laws to include a third classification: Not just employee or independent contractor, but “dependent contractor.”

What should employers with “gig workers” know about this case and the classification test?

Companies that use gig workers should know that, in the past, their workers may be labeled as contractors because they clearly pass most of the tests. That’s not good enough any longer. Workers must clearly pass all three tests to be considered a contractor– and that’s a big shift. It also signals that California and perhaps other progressive states will do more to include gig work under employment law.

What should “gig” or contract workers know about this case and the classification test?

Oftentimes, these cases come up because contractors think they’re being treated unfairly. Perhaps they feel they are working alongside regular employees, but unlike those employees, they’re not making minimum wages or overtime, or aren’t eligible for benefits. Gig workers should know how the law has changed; if they think they should be eligible for these protections, they should speak up!