What test decides if a financial professional is an employee or independent contractor?

In a recent case, the California Court of Appeal for the Second District covered the legislative and judiciary landscape of the law governing the distinction between employees and independent contractors.

The earlier case of Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903 provided the “ABC test.” Under this test, a court would consider a worker an employee under the wage order unless the company satisfied factors identified as parts A, B, and C.

Read more: Real estate agent: employee or independent contractor?

Assembly Bill 5, passed in 2019 and effective in 2020, codified the ABC test in a statute. The bill broadened the Dynamex ruling by extending its reach beyond wage orders and by empowering prosecutors to enforce the rule, but also narrowed it by creating exceptions to the ABC test. The legislature then enacted Assembly Bills 170 and 2257, which added exceptions to the ABC test.

Section 2775 of California’s Labor Code provided that the ABC test in Dynamex would govern the Code. Section 2783, which identified exceptions to applying the ABC test, provided that the “common law control test” in the case of S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341, 349–360 would govern certain occupations.

One exempted occupation related to securities broker-dealers or investment advisers or their agents and representatives registered with the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). Section 2785 made this exemption retroactive.

LPL Financial LLC, the defendant in this case, was a broker-dealer and investment adviser registered with the SEC and the FINRA. The plaintiff and and other allegedly aggrieved “financial professionals” affiliated with LPL fell within the exemption because they were securities broker-dealers or investment advisers or their agents and representatives registered with the SEC or the FINRA.

The plaintiff sued LPL under the Private Attorneys General Act of 2004 (PAGA). The trial court found that the exemption for securities broker-dealers and investment advisors and its retroactive application did not breach the Constitution.

The plaintiff appealed. He wanted the ABC test, not the Borello test, to govern his case.

Statute is constitutional

In the case of Quinn v. LPL Financial LLC, the California Court of Appeal upheld the trial court’s decision. The appellate court focused on constitutional issues and refrained from analyzing whether the plaintiff was an employee or an independent contractor, given that his briefs did not request such an analysis.

First, the appellate court rejected the plaintiff’s argument that the statute violated his right to equal protection by applying the ABC test to others but not to him. The statute had a rational basis, the appellate court said.

The legislature could rationally believe that financial professionals were less vulnerable to exploitation by misclassification as independent contractors since they asked people to trust them with wealth and finances and possessed more skill and bargaining power than the average worker, the appellate court explained.

Second, the appellate court also disagreed with the plaintiff’s argument that the retroactivity of the statute breached his right to due process because it deprived him of his “vested right,” as a former LPL employee, to be reimbursed for business expenses. There was no constitutional basis to support the plaintiff’s proposal to invade legislative authority, the appellate court said.