Part B of the California ABC Test: Outside the Usual Course of Business

By Marc Boulanger, CPA

Part B is often one of the hardest parts of California's ABC test for businesses using independent contractors.

When the ABC test applies, Part B asks whether the worker performs services outside the usual course of the hiring entity's business.

That sounds simple. In practice, it can become one of the most important and fact-intensive issues in an EDD worker-classification audit.

Why Part B Matters in an EDD Audit

In an EDD audit involving 1099 workers, the Department may examine what the company does, what the worker does, and how closely the worker's services relate to the company's ordinary operations.

A worker may satisfy Part A because the person operates with little day-to-day control. The worker may also appear to satisfy Part C because the person has a separate business.

But if the worker is performing services that fall within the hiring company's usual course of business, Part B can still be a problem.

What Does “Usual Course of Business” Mean?

The analysis begins with the hiring entity itself.

What business is it actually in?

What does it sell to customers?

What services does it routinely provide?

What work is central to producing the revenue of the business?

Once that is understood, the worker's role can be compared with the company's ordinary business activity.

A Simple Example

Suppose a retail store hires a plumber to repair a broken pipe.

The store is in the business of selling merchandise. It is not ordinarily in the plumbing business.

That kind of outside repair service is much easier to understand as work outside the store's usual course of business.

Now compare that with a business that sells plumbing services to customers and hires plumbers to perform those services.

The Part B question is very different.

Why the Same Worker Can Be Treated Differently by Different Businesses

Part B is not determined solely by the worker's occupation.

A maintenance worker, bookkeeper, driver, salesperson, installer, or consultant may be outside one company's usual business but closely connected to another company's ordinary operations.

That is why the hiring entity's business model matters so much.

Maintenance Workers and Part B

Maintenance workers are a good example of why Part B should not be reduced to a simple label.

If a company hires an outside contractor to perform an occasional repair that is unrelated to the service the company sells, Part B may be easier to support.

But if maintenance or repair work is part of the service the business routinely provides to customers or properties it operates, the analysis can become much more difficult.

The key is to understand how the maintenance work fits into the business's actual operations.

Real Estate Businesses and Part B

Real estate businesses can present particularly interesting Part B questions because the term “real estate business” can describe very different activities.

A brokerage may primarily be in the business of licensed real estate sales.

A property management business may provide ongoing services involving tenants, vendors, repairs, and property operations.

A real estate investment company may own properties but outsource nearly every operational service.

The role of a maintenance worker could look very different under Part B depending on which of those businesses is involved and what services the business actually provides.

Part B Is Not the Same as “Is This Worker Important?”

A service can be important to a company without necessarily being part of the company's usual course of business.

Almost every business needs accounting, legal services, technology support, insurance, and occasional repairs.

The more useful question is whether the company is actually in the business of providing that service as part of its regular operations.

What Evidence Can Matter in a Part B Analysis?

The analysis is highly factual.

Relevant information may include:

• The company's website and marketing materials
• Descriptions of the services sold to customers
• Contracts with customers
• The company's revenue streams
• The worker's contract
• Invoices submitted by the worker
• The work actually performed
• The company's organizational structure
• How similar work is performed within the company
• Whether employees perform the same type of work

Does It Matter if the Worker Has an LLC?

An LLC can be relevant to the broader relationship, but it does not by itself satisfy Part B.

Part B focuses on the nature of the services compared with the hiring entity's usual business.

The worker's legal entity does not change what the worker actually did for the hiring company.

Does It Matter if the Worker Has Other Customers?

Having other customers may be important to Part C and can help show that the worker operates an independent business.

But it does not automatically answer Part B.

A worker can operate a real independent business and still perform work that falls within the usual course of the hiring company's business.

Does It Matter if the Worker Controls Their Own Schedule?

Control over schedule and work methods is more directly associated with Part A.

A worker can have substantial independence in how the work is performed and still fail Part B if the services fall within the hiring company's usual course of business.

Why Businesses Sometimes Focus on the Wrong Facts

When I hear a business explain why someone was an independent contractor, the first facts mentioned are often:

• The worker had an LLC
• The worker signed a contractor agreement
• The worker received a 1099
• The worker had their own tools
• The worker set their own schedule
• The worker had other customers

Those facts may be relevant somewhere in the classification analysis.

But none of them directly answers the core Part B question:

What I Look at in an EDD Part B Dispute

When Part B is disputed in an EDD audit, I want to define both sides of the comparison as precisely as possible.

I generally want to understand:

• What is the company's actual business?
• What does the company sell?
• How does the company earn revenue?
• What services did the worker actually perform?
• Were those services sold to the company's customers?
• Did employees perform similar services?
• Were the contractor's services occasional or routine?
• How did the relationship fit into normal business operations?
• What documents support the business's description of its operations?

That usually produces a much clearer analysis than arguing from labels alone.

What if the Business Has Multiple Lines of Business?

This can make Part B more complicated.

A company may operate more than one business activity or revenue stream.

The analysis may require a closer look at which part of the business the worker served and whether the worker's services fell within that activity's usual course.

What if an ABC-Test Exception Applies?

Before spending substantial time analyzing Part B, determine whether the ABC test actually applies to the worker.

California law contains statutory exceptions and exclusions. Depending on the worker and relationship, another test such as Borello may apply instead.

For the complete framework, see: California ABC Test in an EDD Audit: A, B and C Explained

What Happens if the Worker Fails Part B?

If the ABC test applies and the hiring entity cannot establish Part B, the worker does not satisfy the full ABC test.

That can support EDD's position that the worker should have been treated as an employee for California employment tax purposes.

Depending on the audit, the resulting adjustment may involve employment taxes, interest, applicable penalties, multiple workers, and multiple quarters.

Can You Challenge EDD's Part B Analysis?

Yes.

A dispute can involve how EDD has characterized the company's usual course of business, how it has characterized the worker's services, whether the ABC test applies at all, or whether an exception changes the classification standard.

Supporting documents and a clear factual explanation of the business can become important.

ABC Test Part B FAQs

What is Part B of the California ABC test?

Part B asks whether the worker performs work outside the usual course of the hiring entity's business.

What does “usual course of business” mean?

It generally refers to the ordinary business activities of the hiring entity. The analysis compares what the company actually does with the services the worker performs.

Can a worker have an LLC and still fail Part B?

Yes. The worker's entity may be relevant to other aspects of the relationship, but Part B focuses on whether the services are outside the hiring entity's usual course of business.

Can a worker have other customers and still fail Part B?

Yes. Other customers may support an independently established business under Part C, but they do not automatically establish that the work is outside the hiring company's usual course of business under Part B.

Does controlling your own schedule satisfy Part B?

Not by itself. Control and direction are primarily Part A issues. Part B focuses on the relationship between the services performed and the hiring company's ordinary business.

What happens if a worker fails Part B?

When the ABC test applies, the hiring entity must establish all three parts. If Part B is not established, the worker does not satisfy the complete ABC test.