Tag Archives: ABC Test

California Adopts New Test for Independent Contractors

On April 30, 2018, in a departure from well-established precedent, the California Supreme Court held that the proper standard for determining whether a worker is an independent contractor or an employee under the state Wage Orders is the “ABC” test.  Prior to this ruling, courts and the California Division of Labor Standards Enforcement had utilized the multi-factor balancing test established by the court in Borello & Sons, Inc. v. Dep’t of Indus. Relations for this determination.

This decision will make it much more difficult for employers to classify workers as independent contractors with potentially far reaching implications including subjecting them to liability for misclassification which could include back payment of federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, workers’ compensation premiums, and unpaid minimum wages and overtime wages and penalties associated with failure to pay proper wages.

The Old Rule (Borello) Continue reading California Adopts New Test for Independent Contractors

Clarification on independent contractor classification for Connecticut employers

In a recent decision (Southwest Appraisal Group, LLC v. Administrator, Unemployment Compensation Act), the Connecticut Supreme Court has provided employers additional guidance on when an individual can be considered an independent contractor – this time in the context of an “independent contractor” working for only one company. Specifically, the Court held that an individual can be considered an independent contractor even if he or she provides services to only one employer.

Background

Southwest Appraisal Group is an automotive damage appraisal business that regularly contracts with independent appraisers for a flat fee.

Upon conducting an audit of Southwest Appraisal Group’s taxes, the Connecticut Unemployment Compensation Act Administrator found that Southwest had misclassified some individuals as independent contractors instead of classifying those individuals as employees. In making this determination, the auditor used the three-prong “ABC test,” which is the test Connecticut uses to determine whether a service provider is an employee or independent contractor.

In order to show that a worker is properly classified as an independent contractor in Connecticut, a company must be able to demonstrate all of the following:

  1. The worker is free from direction and control of the employer;
  2. The services the worker provides are outside the employer’s usual course and/or place of business; and
  3. The worker is customarily engaged in an independently established business of the same nature as the services performed.

Here, the auditor found (and, later, the trial court), that the workers were improperly classified as independent contractors because the company could not satisfy the third prong of the test because the workers in question did not perform work for any companies other than Southwest Appraisal Group during the relevant time period. The fact that workers each owned their own equipment, utilized registered business names, and had business cards with their own contact information and licenses did not change the determination.

Southwest Appraisal Group ultimately appealed the auditor’s finding to the Connecticut Supreme Court. The sole issue before the Court – Does the ABC Test require proof that a worker classified as an independent contractor perform services for multiple companies.

The Court held that evidence of the performance of services for third parties is not required to prove prong C of the ABC Test but, rather, is a single factor that may be considered under the totality of the circumstances analysis governing that inquiry.” In addition, the Court provided 10 factors that are taken into consideration when determining whether prong C is satisfied:

  1. The existence of state licensure or specialized skills;
  2. Whether the putative employee holds himself or herself out as an independent business through the existence of business cards, printed invoices, or advertising;
  3. The existence of a place of business separate from that of the putative employer;
  4. The putative employee’s capital investment in the independent business, such as vehicles and equipment;
  5. Whether the putative employee manages risk by handling his or her own liability insurance;
  6. Whether services are performed under the individual’s own name as opposed to the name of the putative employer;
  7. Whether the putative employee employs or subcontracts others;
  8. Whether the putative employee has a saleable business or going concern with the existence of an established clientele;
  9. Whether the individual performs services for more than one entity; and
  10. Whether the performance of services affects the goodwill of the individual rather than the company for which he or she is performing services.

What Does This Mean for Connecticut Employers?

This case provides valuable guidance for employers who engage the services of independent contractors. It is recommended that Connecticut employers regularly audit their independent contractor relationships to ensure that the totality of the circumstances supports the classification of the worker as an independent contractor.

Clarification On The Connecticut Independent Contractor Test

In a recently released decision (Standard Oil of Connecticut, Inc. v. Administrator, Unemployment Compensation Act), the Connecticut Supreme Court has provided clarification on the Connecticut Department of Labor’s ABC Test for determining independent contractor status. To be properly classified as an independent contractor under this test, a worker must meet all three of the following requirements:

  1. The worker must be free from direction and control in the performance of the service, both under the contract of hire and in fact; and
  2. The worker’s services must be performed either outside the usual course of the employer’s business or outside all of the employer’s place of business; and
  3. The worker must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as the service being provided.

The Case

This case involved a dispute as to whether the installers/technicians Standard Oil used to install and service home heating and alarm systems for its residential customers were properly classified as independent contractors.

When this question was brought before the Connecticut Department of Labor (CTDOL), it determined these workers were improperly classified because (a) they performed work that was part of Standard Oil’s usual course of business and (b) they performed work at customers’ homes, which the CTDOL determined constituted Standard Oil’s places of business. As a result, these workers did not meet 2 of the 3 prongs of the ABC Test and were employees of the Company.

The Connecticut Supreme Court disagreed with this ruling and issued clarification on the factors that should be taken into consideration when evaluating prongs A and B of the ABC Test.

Clarification of Prong B – Defining Place of Business

Prong B of the ABC Test focuses on whether the worker’s services are performed either (a) outside the usual course of the employer’s business or (b) outside all of the employer’s place of business. In this case, the Court’s focus was on the question of whether a customer’s residence would be considered part of the “employer’s place of business” when the work is performed at the residence.

Prior to this decision, the term “place of business” was undefined in Connecticut’s Unemployment Compensation Act. In looking at the legislative history, the Court found that “the employer’s place of business” meant locations that were “in, on or around premises under such employer’s control” – like the employer’s business offices, warehouses and other facilities. In situations where the worker is working at a customer’s residence unaccompanied by company employees and without company supervision, the Court found that the worker would not be performing work at the employer’s place of business. Instead, because the customers (1) determine when the worker can access their homes, (2) bring the worker to the place(s) on their home/property where equipment was to be installed, and (3) identify problems, the customer is in control of the worksite.

Based on this interpretation of “place of business,” the Court determined that the workers did meet Prong B of the ABC Test.

 

Prong A — Free from Direction and Control

Analysis of Prong A of the ABC Test requires a weighing of several different factors to determine whether the workers were under the company’s control and direction. Here, while the Court agreed that there were several factors that indicated the company did exercise some control over the workers, those factors were outweighed by other factors, which demonstrated that the company did not have the right to control the means and methods of the work performed by the workers.

The factors that indicated the company exercised “some control” over the workers were:

  • Workers were prohibited from subcontracting work;
  • Workers were encouraged to wear apparel bearing the company name and display the logo on their vehicles;
  • Workers were paid a set piece rate;
  • Workers could only install equipment provided by the company; and
  • The company retained the right to terminate the workers

However, the following factors indicated that the company did not exercise control and direction over the workers:

  • The company did not own or operate the tools, machinery, or heavy duty vehicles required to perform the work. These were owned/provided by the workers;
  • The company contracted with licensed and certified installers/technicians to perform the work and these workers routinely performed such services for their own businesses or through self-employment;
  • The contracts between the company and the workers provided that the workers exercised independent judgment and control in the execution of any work they performed for the company;
  • The company did not supervise or inspect the work performed by the workers, instead, the workers were monitored by the customers;
  • The workers were free to accept or reject any assignment offered to them without adverse consequences;
  • The company did not provide the workers with an employee handbook;
  • The company did not pay for the workers’ training or require any specific training relating to its products;
  • While the workers were encouraged to wear apparel bearing the company name and display the logo on their vehicles – this was not required;
  • While the workers were paid a set piece rate, the workers submitted invoices to the company and they could realize a profit or loss from the services rendered;
  • The workers paid for their own transportation.

Impact on Connecticut Employers

Employers should consider reevaluating the classification of their independent contractors in light of this decision. When doing this analysis, keep in mind that worker classification is an individualized determination based on the specific facts of each worker relationship. While this case may provide helpful guidance for employers in determining whether an independent contractor is properly classified, the individual circumstances of a specific worker relationship will govern.

New Jersey Supreme Court Reaches Unanimous Decision on Independent Contractors

In a unanimous decision, the New Jersey Supreme Court determined that the “ABC” test should be the single test in determining whether an individual is an employee or an independent contractor, for purposes of resolving a wage-payment or wage-and-hour claim under New Jersey law.  Plaintiffs in the  case, Hargrove, et. al. v. Sleepy’s LLC ,delivered mattresses for defendant.  The drivers  were classified as independent contracts, not employees.  As independent contractors, the drivers did not receive overtime pay or benefits.  The drivers sued claiming that they were misclassified and therefore entitled to overtime and benefits.

In it’s decision, the court applied the “ABC” test to determine that the drivers were employees, not independent contractors.  The “ABC” test presumes an individual is an employee unless the employer can make certain showings regarding the individual employed, including:

  1. the individual is free from control or direction over the performance of the service
  2. the service is either outside the usual course of the business or the service is performed outside of all the places of business
  3. the individual is customarily engaged in an independently established trade, occupation, profession or business

The burden is on the employer to prove the above.  This will make it extremely difficult for New Jersey employers to prove that an individual is a true independent contractor; accordingly, use caution when classifying your workforce.