What is the difference between an independent contractor and an employee?

Workers can be employees or they can be categorized as independent contractors. The distinction is very important, as the California Labor Code treats them differently. Assembly Bill 5, which became law in 2019, provides employers a methodology for determining whether a new hire is an actual employee or employed as an independent contractor.

While most employers class workers correctly, some attempt to categorize full employees as independent contractors to avoid certain responsibilities and obligations. This is a very serious issue that can lead to fines and other types of legal reprisal. That is why employers are urged to use the ABC test when dealing with new hires. Understanding how this testing process works can also benefit workers in the event they are misclassified.

Understanding the ABC test

There are three conditions that must be met to classify a worker as an independent contractor. They are:

  • The work performed falls outside of normal operations. As an example, if a plumber hires a graphic designer to help with marketing, that work would be outside the normal services provided by a plumber. Therefore, that worker would likely be an independent contractor.
  • The worker is not under the control of the company. Independent contractors are not beholden to the same hours or workplace as full-time employees. In this sense, independent contractors operate outside the rules and guidelines that normally apply.
  • The worker routinely performs this type of work for other clients on a regular basis. Graphic designers, accountants, consultants, copywriters, and other professions typically provide services to multiple clients, and these services exist outside the business they are currently contracted with.

Other Tests That Can Be Applied

The ABC test was designed as a simplified method of differentiating between employees and independent contractors. However, some situations may be more complex. In this case, employers can also use the Borello test, which entails multiple factors. These factors include the skill required to provide the service, how the worker receives payment, whether the working relationship is intended to be permanent, the level of supervision, among many other factors. Because the Borello test is more comprehensive, it can be applied to complex business relationships not easily able to be categorized.