Independent Contractors

Overview & Background

State legislatures solely determine the legal test that is used in a particular state for evaluating whether a “worker” in question is an independent contractor or employee. PHTA monitors and engages at the state level on this topic due to the major impact it can have on the pool construction and service industries, where many companies have relied on the independent contractor relationship for many of its core functions. PHTA looks for attempts to create tests using factors to determine an employee’s status as well as general changes to the definition of employee or independent contractor.

The “ABC Test” is the strictest legal test for defining independent contractor status. Many states operate under this extremely tough legal test to define independent contractor status. Some of the states where their legislatures have adopted the “ABC Test” include California, Connecticut, Delaware, Illinois, Indiana, Massachusetts, Nebraska, Nevada, New Hampshire, New Jersey, Vermont, Washington, and West Virginia. Under statute and case law, an ”employment” relationship will exist unless and until the employer is able to demonstrate that all three parts of the so-called “ABC Test” are met.

Some states have a more forgiving test for independent contractor status. It is therefore usually easier in these states for a company to defend the status of its independent contractors. Those states use a multi-factor “control and direction” test (also called a common law test) to decide classification disputes, much like the famous 20-factor common law test used by the IRS. Some of the states using the common law test include Florida, Iowa, New York, Texas, and Virginia. In different states, courts interpret the common law factors quite differently. This 20-factor legal test is generally easier for companies proving independent contractor status because the company does not have to be persuasive on each factor. With the 20-factor common law test, the company has to make a persuasive overall showing about the validity of the independent contractor relationship, with certain factors being more important than others, depending on the particular state and its case law and regulations.

Still other states (such as Wisconsin) use a unique independent contractor test relying on several certain stated factors. Some states, such as Maine, have adopted very tough multi-factor tests. In Maine, for example, the “worker” must pass each of five factors and, in addition, pass another three factors from a list of seven factors in order to legally prove independent contractor status.

Certain industries have special legal exemptions granting them “favored status” so that those industries can have independent contractors “by law” (who are therefore not eligible for state unemployment insurance benefits). State legislatures vote in these industry-specific exemptions under which certain kinds of workers are independent contractors by state law. It is also important to note that some companies have safely passed IRS audits for their independent contractors, but then they later fail a state unemployment insurance audit evaluating the very same independent contractors. Companies need to develop careful legal strategies and examine their relationships to ensure their worker classifications are in compliance with the current criteria in their respective states.

California

• On April 30, 2018, the CA Supreme Court issued a landmark decision in the matter of Dynamex Operations West, Inc. v. Superior Court. See also the CA Dynamex Ruling Write Up.
• Assembly Bill 5 was passed by the Legislature on September 9 and signed by Governor Newsom on September 18. AB 5 confirms and expands upon the April 2018 CA Supreme Court decision. This decision and AB 5 will apply the “ABC Test” to the question of employee vs. independent contractor. Read the full PHTA write-up here.
• AB 5 was amended in 2020 to include 15 new industries under the freelance subcontractor exemption. The new version of AB 5 is AB 2257. It was signed into law by the Governor as an urgency bill and went into effect September 4, 2020. AB 2257 also makes minor changes to the Business-to-Business exemption and the Referral Agency exemption (i.e., task rabbit, etc.), which may affect segments of the swimming pool and spa industry. For everyone else, the employee/independent contractor criteria in AB 5 is essentially unchanged, at least for now.
• Independent Contractor Background and Understanding of AB 5 and AB 2257