California’s New Independent Contractor Test: The “ABC” Test
On April 30, 2018, the California Supreme Court handed down its long-awaited ruling in Dynamex Operations West, Inc. v. Superior Court, addressing the test for determining whether an individual worker should properly be classified as an employee or, instead, as an independent contractor.
The decision stands out significantly for its extreme importance for workers, businesses, and the public generally. The matter of classifying a worker as independent contractor, as opposed to a direct employee, affects employers’ responsibility of paying Social Security and payroll taxes, unemployment insurance taxes, and providing worker’s compensation insurance. Perhaps most importantly, it affects employers’ compliance with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees.
Since 1989, the previous standard used for classifying workers as employees or independent contractors was based upon a multifactor test that considered, among other factors, the worker's skill, the method of payment by the hirer, and the nature of the business to determine the level of control exercised over the worker. In Dynamex the employer had classified their delivery drivers as independent contractors, on the basis that the drivers had significant control over their own working conditions by being able to set their own hours and drive for multiple companies.
The new standard adopted by the Supreme Court (dubbed the "ABC test") makes it harder for companies to classify workers as independent contractors, rather than employees. The new test sets forth three factors that employers must meet in order to properly classify a worker as an independent contractor – and in the process greatly expands the definition of "employee" under California law.
In order for a worker to be considered an independent contractor, the following three factors must be met:
The worker is free from the control and direction of the hirer in connection with the performance of the work, both under contract for the performance of such work and in fact; and
The worker performs work that is outside the usual course of the hiring entity's business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed by the hiring entity.
The Dynamex holding creates a presumption that workers in California are direct employees and, therefore, are entitled to the protections of California’s labor laws, regarding employees’ wages, hours and working conditions. It is the employer's burden to satisfy these three "ABC" factors in order to lawfully classify the worker as an independent contractor instead of an employee.
The court gave the example that a plumber hired by a retail store to repair a bathroom leak is not performing work that is part of the store's usual business and would, therefore, be considered an independent contractor of that store. However, seamstresses sewing at home using materials provided by a clothing manufacturer would probably be considered employees of the manufacturer.
The Dynamex decision very likely opens the door to an increase in lawsuits by current and former workers, challenging their classification as independent contractors.
Employers are encouraged to review their current contracts with those whom they are classified as independent contractors to ensure they can meet the requirements of the new "ABC test."