In California, an individual performing services may be a statutory employee, an employee under the ABC test, or an employee under the Borello test. The individual can also be an employee exempt from Unemployment Insurance or Disability Insurance coverage, or an independent contractor. There are various status issues to consider when making an employment determination.
The ABC test is used to determine if an individual is an employee or independent contractor in California beginning January 1, 2020.
An individual providing labor or services for compensation is considered an employee and not an independent contractor, unless the hiring entity demonstrates that all three conditions of the ABC test are satisfied:
- The individual is free from the control and direction of the hiring organization in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- The individual performs work that is outside the usual course of the hiring entity’s business.
- The individual is routinely doing work in an independently established trade, occupation, or business that is of the same type as the work being performed.
Note: The hiring organization must show that all conditions of the ABC test are met in order to classify the individuals as independent contractors, unless there is a statutory exclusion or exception.
Learn more about AB 5 and how to determine if an individual is an employee or an independent contractor by viewing the recorded webinar AB 5 Motor Carrier Worker Classification.
ABC Test Exceptions
The ABC test is used for most individuals, but for some jobs, industries, and contracting relationships, the Borello multifactor test applies.
For more information on employment status, visit the Employment Status Portal.
Proposition 22 added sections 7451 through 7452.5 to the Business and Professions Code which makes app-based drivers for network companies independent contractors and not employees or agents if the network company meets certain conditions beginning December 16, 2020.
A statutory employee is defined as an employee by law under a specific statute.
For more information on statutory employment, refer to Information Sheet: Statutory Employee (DE 231SE)(PDF).
Certain employees and specific types of employment are not subject to one or more payroll taxes, which include:
Unemployment Insurance (UI), Employment Training Tax (ETT), State Disability Insurance (SDI), and Personal Income Tax (PIT) Withholding.
For more information on exempt employment, refer to Information Sheet: Exempt Employment (DE 231EE)(PDF).
Help Us Fight Fraud
Hiring entities are responsible for classifying individuals providing labor and services correctly. We will continue to inspect and audit hiring entities to make sure they meet payroll tax requirements. These efforts make sure state laws protect individuals and prevent unfair competition that may lead to higher taxes and expenses for businesses.