California’s ‘ABC’ test for Independent Contractors – some key lessons for Australia

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Australian workplace lawyers are parochial by nature. We don’t look at international examples very often.  And given the tens of thousands of pages of domestic industrial instruments that we are forced to wade through each year, we can hardly be blamed for not seeking out more in our spare time.

California, in particular, rarely gets a mention in the Australian workplace law context unless it involves something scandalous about Hollywood, or something very ‘cool’ about Silicon Valley.  But in recent months, the Supreme Court decision of Dynamex Operations West, Inc v The Superior Court of Los Angeles County (Dynamex), has caught everyone’s attention, for significantly developing the law of the state in relation to independent contractors.  

Australia, where the law of independent contractor relationships is confusing and unsatisfactory, would be wise to take heed of this, as it offers us plenty to think about.

The Australian position on Independent Contractors

The Federal parliament made a bold statement years ago against ‘sham contracting’ –the avoidance of paying employee entitlements by presenting an employment relationship as a contractor relationship.  We don’t like ‘sham contracting’ – it’s ‘un-Australian’. Parliament has made it a civil penalty provision, and we impose large fines against offenders.

However, the parliament has not told us what ‘sham contracting’ actually is. They have never told us who is an independent contractor, and who is an employee.  Typical to Australian politicians, parliament has managed to take a ‘tough stand’ – while at the same time managing to not make any effective law. And this presents key practical issues. Having a strict prohibition against ‘sham contracting’ is an illusory protection, unless we have an equally stringent distinction between employee and contractor.

Currently, to find out if someone is an employee, we need to delve into the depths of the common law.  Thirty years ago, in Stevens v Brodribb Sawmilling Co (1986) 160 CLR 16 (Stevens), the High Court gave its seminal ruling on this issue.  Stevens, a truck driver involved in the Brodribb’s logging operations was injured through the negligence of Gray, a ‘snigger’ working for Brodribb. If Gray could be classified as an employee of Brodribb, then Brodribb would be liable for Grey’s injuries under the doctrine of vicarious liability.  If not, he would only be able to seek compensation from Gray.

In determining this question, the High Court pointed to a number of factors of importance including:

  • The existence of a power to control the worker – the greater the control the more likely an employment relationship can be found;
  • The method of remuneration and whether income tax was deducted;
  • The provision of equipment – independent contractors are more likely to provide their own equipment;
  • The obligation to work – independent contractors are not usually subject to an ongoing obligation to accept work;
  • The hours of work – usually independent contractors set their own hours of work, whereas employees are subject to the hours set by the employer;
  • The provision of holidays – holidays are usually only provided to employees;
  • The power to delegate work to others – only independent contractors can delegate the work.

The High Court noted that Gray was paid by the job and no income tax was deducted. He provided his own equipment. He was free to seek other work and, whilst work had been regular, Brodribb was under no obligation to provide it to him on an ongoing basis. Gray was free to set his own hours, received no holidays and could delegate his work to others (and Gray in fact had in the past delegated work to his son). As a result, Gray was not an employee of Brodribb and therefore, Brodribb was held not liable to Stevens for the injury caused.

A later decision in Hollis v Vabu Couriers (2001) 207 CLR 21 (Hollis), was also a case of vicarious liability for a negligently caused injury.  This time a bicycle courier had injured a member of the public. If the courier was an employee, the company would be liable for the injury. Some factors in this case suggested that the bicycle couriers were independent contractors. In particular, the couriers owned and maintained their own bikes and supplied all accessories other than their radios and their uniforms.

However, the High Court found other factors more persuasive, in particular, the fact that the couriers could not refuse to undertake work and probably could not delegate work. Payment was overseen by Vabu which accounted for deliveries and made deductions from pay. Annual leave was possible. Perhaps most important, was the fact that the couriers were seen as ‘emanations’ of Vabu, being required to wear the uniforms of Vabu and maintain certain standards as to their appearance. Vabu had the clear intention that the members of the public would identify couriers as Vabu’s staff. As such, Vabu was found to be vicariously liable for the injury to Mr Hollis.  

17 years later, Hollis is still good law in Australia.  While it is an interesting case, and not in any way incorrect, it is hardly satisfactory in a context where literally every other aspect of the employment relationship is strictly regulated.  Clients can be forgiven for being disappointed when their employment lawyers still cannot give them a simple or straight answer about their employment options.

As the nation’s economy rapidly changes into the modern era – we need law with greater clarity and certainty, which can be applied prospectively by the business community.  

How is California Different?

Until recently, the law in California has also been based on common law ‘indicia’, very like our own, with some slight differences.  The test has been known as the ‘Borello standard’, following on from the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341.

Similar to Stevens and Hollis, the primary test has been the extent of a principal’s ‘control’ over when and how the work is performed. However, like Australian Law, this was not the only test.  Additional factors were considered, some of which (but not all) are part of our law. Factors included whether the person was engaged in an occupation distinct from that of the principal, and whether the work was a part of the regular business of the principal. Whether the principal or the worker supplies the tools and equipment; whether the worker was required to make a financial investment in the equipment or materials required by his or her task; whether the service rendered required a special skill; whether that kind of work is usually done under the direction of the principal or by a specialist without supervision; the worker’s opportunity for profit or loss depending on his or her skill; the method of payment, whether (by time or by the job);  and the degree of permanence of the working relationship.

Like Australia, whether or not the parties believed that they were creating an employer-employee relationship may have had relevance, but was not a determinative factor. The assessment was a question of law based on objective tests.

In the landmark case of Dynamex, the court radically stripped back the indicia, in favour of what is known as the ‘ABC’ test.  This is a simple test of strict application. For a worker to be regarded as an independent contractor, a principal bears the onus of satisfying three conditions:

A – Is the worker free from control and direction, both as a question of the contract and as a question of fact?

B – Does the worker perform work outside the usual course of the hiring entity? (What duties does the worker do? And are they part of the principal’s core business?)

C – Is the worker customarily engaged in an independently established trade or business? (Has the worker genuinely established their own trade or business, or has the ‘contractor’ relationship been established, unilaterally, by the Principal?)

The ABC test is, in many ways, a distillation of the former considerations.  However, they are no longer mere ‘considerations’. It is a strict test, and the onus is with the principal.  If in doubt, this test will result in an employment relationship by default. If the Australian parliament is serious about protecting workers from exploitation, then this three-part test has a ring of workable statutory simplicity, which in many ways is appealing.  

It may be too simple (which in law, paradoxically, generally means it becomes too hard). Or it may lead to a brief era of elevated litigation while the bugs are ironed out by case law, statutory amendments, qualifications, and ‘carve-outs’.  It may even cause a few specific industries to re-invent themselves. In some cases, consumer prices may need to increase.

Dissenters would claim that the extent to which the test offends fundamental principles of freedom of contract would make this is a ‘nanny state’ law.  In many ways this is true, but that ship has sailed from Australia long ago. As a nation, we value workplace rights above freedom of contract. We always have, and always will.

Those few businesses that are currently still able to make financial savings through the regular and systematic use of low income independent contractors, are exploiting a loop hole that is no longer available to the majority of Australian businesses. It is an unfair advantage. The ABC test would close this loop-hole, while leaving the more genuine forms of independent contracting unaffected.  Fundamentally, it would also make law clear, certain, and prospective, whether running a business, advising clients, or enforcing the law.

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