Employers of all sizes rely on independent contract labor to keep expenses low, productivity high, and provide flexibility to meet their clients’ needs. Estimates are that individuals operating as independent entities, freelancers, or on-demand employees currently make up more than one-third of the US workforce¹. But a recent landmark California Supreme Court decision, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, could create costly changes for companies that rely heavily on contractors, including so-called “gig economy” workers.
The Dynamex case began when a group of drivers sued package delivery company Dynamex Operations West, arguing that the company had misclassified them as independent contractors, rather than as employees. The Court agreed with the drivers and adopted a new test for determining whether a California worker should be classified as an employee or a contractor. Employers should expect that significantly fewer workers will qualify as contractors.
The new worker classification test, known as the “ABC Test,” replaces an older test that California employers have relied on for nearly three decades. Under the old rule, called the “Borello standard,” courts focused primarily on whether a hiring entity could control the “manner and means” by which a worker performed the relevant work. Courts also considered a variety of other factors under the Borello test, such as the degree of skill required, the method of payment, and the nature of the company’s regular business.
The newly-adopted ABC test is simpler, and far more labor-friendly, than the old rule. Under the ABC test, workers are presumed to be employees, not contractors. Dynamex places the burden on the business to overcome this presumption by proving that a worker is a contractor, otherwise the worker is presumed to be an employee. The business must show that the worker meets all three of the following criteria: A) the worker is not subject to the direction and control of the hirer in connection with the performance of the work (this requirement must be met both under the terms of the contract and “in fact”); B) the worker performs work outside of the usual course of the hiring entity’s business; and C) the worker is customarily engaged in an independent trade, occupation, or business of the same nature as the work performed for the hiring company (i.e., the worker cannot work exclusively for the hiring company).
The Court gave an example, which illustrates the particularly challenging “B” element. “[W]hen a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will … be sold by the company,” or “when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes,” the workers are part of the … usual business operation…” and the workers would be deemed employees, not contractors.
The Bottom Line
Under the new Dyanmex standard, many California workers presently classified as contractors will no longer qualify for that designation. Reclassifying those workers as employees will make them eligible for protection under the state’s wage and labor laws (e.g., minimum wage and overtime, mandatory rest breaks, meal breaks, sick leave, etc.).
California employers that use independent contractors as part of their business models should conduct thoughtful risk assessments to evaluate whether their workers are properly classified under the new ABC test. Misclassifying employees as independent contractors can have significant, and expensive, consequences – including liability for back wages and penalties.
Companies that engage independent contractors in California should consult with qualified employment counsel to ensure compliance under the new decision. Clint Robison, managing partner of O’Hagan Meyer’s Los Angeles office, can be reached at (213) 306-1620 or firstname.lastname@example.org.