What Is The ABC Test, And How Could It Harm Freelancers and Independent Contractors?
Solopreneurs, franchise owners and small business owners who hire independent contractors have serious cause for concern.
This story is part of Entrepreneur's Campaign For Our Careers, an effort to raise awareness about the harmful effects of the PRO Act. For more about the campaign, click here.
Freelancers and independent contractors in America may soon face a test — and if they don’t pass it, their ability to earn a living could radically change.
The test is called the ABC Test, and it’s included in federal legislation called the Protecting the Right to Organize Act (commonly known as the PRO Act) that’s currently being considered by Congress. If freelancers or independent contractors pass the test, they can continue working independently. If they fail it, they’d be classified as employees of their clients for the purposes of labor law — which means they may no longer be able to operate independently.
What’s the purpose of the ABC Test? As is the case with most legislation, it depends on whom you ask.
Supporters of the PRO Act, including President Biden, say it’s a way to protect workers from exploitive relationships with bad-actor companies that intentionally misclassify employees as independent contractors. The law would make more Americans legally eligible to form unions (which independent contractors cannot do) and receive employee protections like the minimum wage.
Opponents say the bill unnecessarily lumps together many different kinds of contractors, consultants, small business owners and entrepreneurs, and that it would upend the livelihoods of millions of Americans who happily choose self-employment. The ABC Test language is so strict, they say, that it could even turn franchise owners into employees of their national brands.
Many entrepreneurs stand to be harmed. More than a third of the U.S. workforce had independent contractor income in 2020. That includes full-time solopreneurs, part-time freelancers, occasional app-based drivers or something in between — 59 million Americans in all. In the case of franchise owners who could effectively become employees of their national brands, franchise industry advocates say the economic harm to minority communities would be demonstrable, given that more than 30% of franchises are minority-owned.
So what is the ABC Test, and how does it work?
Regulators use different types of tests to distinguish between independent contractors who control their own rates and schedules, and employees who work within the system of bosses and legal mandates such as the minimum wage. The ABC Test has been around in some form since the 1930s, but the version in the PRO Act is different from most and has never been implemented on the federal level. It says a person can only remain an independent contractor, for the purposes of labor law under the PRO Act, if he or she meets all three of the following criteria:
- the individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact;
- the service is performed outside the usual course of the business of the employer; and
- the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.
If an independent contractor cannot pass all three parts of this ABC Test in the PRO Act, then he or she is reclassified as an employee under the National Labor Relations Act. The practical effect of this change, experts say, could mean that an Uber driver must become an employee of Uber, or that a freelance writer must become an employee of a publication she writes for, or that an independent IT consultant must become employed by a company he’s contracting with. Companies, in turn, would have to decide whether to hire independent contractors as part- or full-time employees — or simply stop working with them.
The PRO Act’s version of the ABC Test is currently only used in Massachusetts and California, and Biden praised California as having “paved the way” for the nation with the way it applied the test. Therefore, examining how the ABC Test law played out in California is a strong indicator of how independent contractors nationwide would fare under the federal plan.
California’s ABC Test law, called Assembly Bill 5, went into effect January 1, 2020. Much as proponents of the PRO Act do today, proponents of AB5 promised that it would “stop shameful exploitation of gig economy workers.”
But in the year and a half since AB5 went into effect, California has instead proved a cautionary tale.
AB5’s effects left women business owners reeling; saw lawsuits filed against the state by trucking firms, franchises, and freelance journalists and photographers; led state lawmakers to pass cleanup legislation so that more than 100 professions are now exempted; and persuaded 59% of Californians to vote in favor of exempting app-based rideshare and delivery drivers from the law. As the Orange County Register wrote in May 2021, the law “tried to force companies to hire contractors as permanent employees, but it instead destroyed job opportunities.”
To be clear, the PRO Act would not apply the ABC Test in all the ways California did, or in all the ways Biden has promised to do. However, some experts—including a former Republican chairman of the National Labor Relations Board—say that even on its own, the PRO Act would have the same impact nationwide. A former Democratic chairwoman of the board says the PRO Act would lead to years of regulatory and court wrangling.
For all these reasons, solopreneurs, franchise owners and small business owners who hire independent contractors should be watching the PRO Act closely, and exploring how their livelihoods could be harmed if it becomes federal law.
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