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EDD ABC Test : What to know about EDD Worker Classification Audits

Assembly Bill (AB) 5 and AB 2257 replaced the common law test with the EDD ABC test to determine whether a worker is an employee or independent contractor in California. The ABC test must be used for the purpose of the Unemployment Insurance Code beginning January 1, 2020. Under the ABC test, the EDD will classify a worker as an employee and not an independent contractor, unless the hiring entity meets all three conditions of the ABC test:

  1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If all three of the above conditions are satisfied, then the EDD will reclassify an independent contractor as an employee.

What are the exceptions to the EDD’s ABC Test?

Section 2775 of Assembly Bill No. 2257 and the holding in the Dynamex case do not apply to the following occupations as defined in the paragraphs below, and instead, the determination of employee or independent contractor status for individuals in those occupations shall be governed by Borello:

(a) A person or organization who is licensed by the Department of Insurance pursuant to Chapter 5 (commencing with Section 1621), Chapter 6 (commencing with Section 1760), or Chapter 8 (commencing with Section 1831) of Part 2 of Division 1 of the Insurance Code or a person who provides underwriting inspections, premium audits, risk management, or loss control work for the insurance and financial service industries.

(b) A physician and surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the State of California pursuant to Division 2 (commencing with Section 500) of the Business and Professions Code, performing professional or medical services provided to or by a health care entity, including an entity organized as a sole proprietorship, partnership, or professional corporation as defined in Section 13401 of the Corporations Code. Nothing in this subdivision shall circumvent, undermine, or restrict the rights under federal law to organize and collectively bargain.

(c) An individual who holds an active license from the State of California and is practicing one of the following recognized professions: lawyer, architect, landscape architect, engineer, private investigator, or accountant.

(d) A securities broker-dealer or investment adviser or their agents and representatives that are either of the following:(1) Registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority.(2) Licensed by the State of California under Chapter 2 (commencing with Section 25210) or Chapter 3 (commencing with Section 25230) of Division 1 of Part 3 of Title 4 of the Corporations Code.

(e) A direct sales salesperson as described in Section 650 of the Unemployment Insurance Code, so long as the conditions for exclusion from employment under that section are met.

(f) A manufactured housing salesperson, subject to all obligations under Part 2 (commencing with Section 18000) of Division 13 of the Health and Safety Code, including all regulations promulgated by the Department of Housing and Community Development relating to manufactured home salespersons and all other obligations of manufactured housing salespersons to members of the public.

(g) A commercial fisher working on an American vessel.

What is the difference between the ABC Test and the Borrello Test?

Under the EDD interpretation and application of Labor Code provisions, both the Borello test and the ABC test assume that the worker is an employee and the hiring entity must prove that the worker is an independent contractor.

However, the ABC test is designed to make it easier for both businesses and workers to determine in advance whether a worker is an independent contractor or an employee. In other words, it is aimed at being more predictable than the multifactor approach used under Borello.

Unlike the ABC test — in which the inability of the hiring entity to demonstrate any part of the three-part test means that the worker is not an independent contractor — under the Borello test, no single factor determines whether a worker is an employee or an independent contractor. Moreover, courts consider all potentially relevant factors on a case-by-case basis in light of the nature of the work, the overall arrangement between the parties and the purpose of the law.

As you can see, there are several exceptions to the ABC test. When the EDD audits a business, the auditor will review the factors in the ABC test to make any adjustments or reclassifications. Several categories of occupations will not be governed by the ABC test, and will be governed by the prior independent contractor classification factors.