California Supreme Court delivers new ABC test for independent contractors

Dynamex: A New Test for Independent Contractors

On April 30, 2018, the California Supreme Court decided the long-awaited case of Dynamex Operations West, Inc. v. Superior Court.  In doing so, it pronounced a new legal standard for independent contractors that will make it much more difficult for businesses to properly classify workers as independent contractors.  The decision is admittedly very pro-employee, the opinion arguing that the state Wage Orders should be the basis for the analysis both for the benefit of “law-abiding businesses” and to protect workers who “generally possess less bargaining power than a hiring business.”

The effects of Dynamex will be wide ranging and companies in the gig economy, such as Uber and Lyft, may be particularly hard hit.  However, every employer must analyze workers they consider independent contractors immediately under this test, making corrections as soon as possible if they cannot meet the standard.  Misclassification can mean very expensive wage and hour violations, in addition to increasing the risk of class action lawsuits.

The ABC Independent Contractor Test

The test that the Supreme Court pronounced for determining whether a company “employs” or is the “employer” of a worker for purposes of the California Wage Orders is called the “ABC” test.  Under the ABC test, a worker is considered an employee under the Wage Orders unless the hiring entity establishes all three of the following elements:

  1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The employer has an affirmative duty under this test to prove independent contractors are properly classified.  While the test has some of the same characteristics of prior tests employed in California, considered thoughtfully it is a much more difficult test to satisfy.

Many employers prefer to use independent contractors when they can because doing so avoids expenses, such as providing workers’ compensation insurance, withholding taxes from wages, and complying with wage and hour laws.  Many workers also prefer the title for tax reasons and will ask to be so classified.  The line for determining the difference between an employee and an independent contractor has always been difficult to find under the common law test, which is something the California Supreme Court sought to cure by applying this new and stricter rule, which is based upon the definition of “employ” in the California Wage Orders.

History of Dynamex Case

In Dynamex, two delivery drivers who were classified as independent contractors filed suit alleging they performed the same tasks as contractors that they had performed when they were classified as employees—arguing that the reclassification was misclassification.  The plaintiffs sought to represent approximately 1,800 drivers the company engaged as independent contractors.  After almost two decades in the court system, the case arrived before the California Supreme Court, which decided to adopt a test that would have broad application to effectuate the purpose and objectives of the Wage Orders.

In coming to its decision, the Supreme Court considered the common law, more flexible, Borello standard and an alternative “economic realities” standard put used by some federal jurisdictions.  Instead, it turned to the “suffer or permit” standard in the Wage Orders to interpret state law, placing the burden on the hiring entity to establish that a worker is an independent contractor and to establish each of the three factors embodied in the “ABC” test above.

Are They An Independent Contractor?

The first prong of the test (“A” prong) is like the prior common law control standard.  A worker who is, either by contract or by practice, subject to the type and degree of control a business typically exercises over employees should likewise be considered an employee.  Thus, employers must be able to establish that a worker who is an independent contractor is free of such control.  This does not mean just micromanagement.  An employer must not control the manner and means used to do the job.  Prong “A” is where the similarities end.

The second prong (“B” prong) means that employers cannot hire independent contractors to do the same tasks employees normally do for the type of business in question.  Thus, this prong expands those within the definition of employee to include almost any worker who engages in the same business as the hiring entity.  The example provided by the Supreme Court was of a retailer hiring a plumber or electrician to perform maintenance on their premises.  These jobs are outside of the company’s business and would meet the test to allow independent contractor status.  In contrast, if a clothing manufacturer hires a work-at-home seamstress, this prong would fail.

Finally, the third prong (“C” prong) appears to seek to avoid businesses hiring individuals as independent contractors when they work solely for the employer.  Thus, the test seeks to identify those workers that have taken steps on their own to create their independent business.  Instead, if they are “simply designated as an independent contractor by the unilateral action of a hiring entity,” then they will not meet this standard.  That said, an employer does not necessarily have to prove that the worker incorporated, obtained a license, advertised, or the like to meet this prong—although those facts would be favorable.  However, it is also not enough that the company does not prohibit or prevent the worker from engaging in an independent business.  To be safe, there should be some factual evidence that the independent contractor is in business for himself or herself—such as actually providing services of the same type to other clients, having a business license, etc.

While it will be some time before anyone will know exactly how this test will be applied, business owners should take note now and a serious review of anyone designated as an independent contractor and err on the side of compliance.

–Jamie E. Wrage, Esq.

Related Posts

Leave A Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.