ALERT – INDEPENDENT CONTRACTORS OR EMPLOYEES?

Authors: Anne K. WilsonWilliam P. Keith

The California Supreme Court recently announced a dramatic change in the standard for determining whether a worker should be classified as an employee or independent contractor.  In Dynamex Operations West, Inc. v. Superior Court, No. S222732, 2018 WL 1999120, --- P.3d --- (Cal. Apr. 30, 2018) (“Dynamex”), the Court replaced the patchwork, multi-factor common law test with the rigid three-factor “ABC” test.

Under the ABC test, California workers will be considered independent contractors only if the hiring entity can prove all three of the following:

A. that the worker 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;

B. that the worker performs work that is outside the usual course of the hiring entity’s
business; and

C. that the worker is customarily engaged in an independently established trade occupation, or business of the same nature as the work performed.

The new test places an affirmative burden on companies to prove that independent contractors performing work for them are being properly classified.

A: “Freedom from Control and Direction”

Part “A” is similar to the old common law test, asking whether the worker is free from the “type and degree of control a business typically exercises over employees.”  The Court confirmed that a business “need not control the precise manner or details of the work” in order to be found to have maintained the necessary control sufficient to lead to a finding that the worker is an employee.

B: “Outside the Usual Course of Business”

Part “B” is the biggest hurdle for businesses seeking to classify workers as independent contractors.  This element focuses on whether the worker is “providing services to the business in a role comparable to that of an employee,” including any worker whose “services are provided within the usual course of the business” and would “ordinarily be viewed by others as working in the hiring entities’ business.”  This broad language appears to expand the definition of employee to include almost any worker who engages in the same business as the hiring entity.

The California Supreme Court used the example of a retailer that hires a plumber or electrician to perform maintenance at their establishment, stating that hiring such a worker would be outside of the company’s business and, thus, the hiring entity would be able to demonstrate independent contractor status.  However, the Court stated that a clothing manufacturer that hires a work-at-home seamstress, or a bakery hiring a cake decorator, would not typically be able to make such a demonstration.

C: Customarily Engaged in Independent Trade, Occupation, or Business

Part “C” asks whether the worker “independently has made the decision to go into business for him or herself,” evidenced by things such as “incorporation, licensure, advertisements, [or] routine offerings to provide the services of the independent business to the public or to a number of potential customers.”  If, on the other hand, the worker is “simply designated as an independent contractor by the unilateral action of a hiring entity,” there is substantial risk he or she will be found to be an employee.

The Court stated that a business does not necessarily have to prove that the worker in question took steps such as incorporation, licensure, advertising, and the like to prove part C.  However, the simple fact that a company does not prohibit or prevent a worker from engaging in such an independent business will not be sufficient for a hiring entity to establish a worker has independently made the decision to go into business for himself or herself.

The Reach of the ABC Test

While the Dynamex Court limited its holding to cases involving whether a worker is an employee or independent contractor for purposes of the California wage orders, the decision potentially impacts all types of cases involving worker classification.  Plaintiffs are likely to argue that the ABC test applies in a wide array of situations, and lower courts are likely to use the ABC test as a guiding light going forward.

California businesses can also expect that plaintiffs will seek to apply the ABC test retroactively.  Potential liability for misclassification of a worker under the California wage orders includes claims for unpaid minimum and overtime wages, missed meal and rest periods, failure to provide itemized wage statements, failure to provide required workplace conditions (e.g., suitable seating and changing rooms where required), failure to maintain required records of employment, and penalties, among other things.

How We Can Help

The ABC test creates a new, stricter standard, which places the burden on the hiring entity to justify a worker’s classification as an independent contractor.  We can assist you in evaluating your current workforce under the new ABC test, particularly parts B and C, which are new to California.  With a better understanding of how your workers fit into the new test, we can provide recommendations and counseling to limit liability and improve efficiency.  

Contact Li-An Leonard at leonard@dsmw.com or (619) 209-3031 or
Annie Wilson at wilson@dsmw.com or (619) 209-3068

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