On April 30, 2018, the California Supreme Court adopted a new legal standard that will directly affect California businesses that classify workers as independent contractors. In Dynamex Operations West, Inc. v. Superior Court ("Dynamex"), the Court ruled that all workers are presumed to be employees under the California Wage Orders. To rebut this presumption, the hiring entity must satisfy the requirements of the "ABC" test.
Under the "ABC" test, the hiring business must demonstrate all of the following to overcome the employee presumption:
(A) 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 the work and in fact; and
(B) The worker performs work that is outside the usual course of the hiring entity's business; and
(C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The Dynamex Case
Dynamex is a nationwide delivery and pickup service company that operates a number of business centers in California. Prior to 2004, Dynamex classified its California drivers as employees, but in the beginning of 2004, it converted all drivers from employees to independent contractors. In 2005, several delivery drivers filed suit alleging they performed the same tasks they did as Dynamex employees and so the reclassification violated California law. After years of litigation, the Court concluded it is more consistent with the history and purpose of the standards in the California Wage Orders to interpret state law as placing the burden on the hiring entity to demonstrate that a worker is an independent contractor.
With this new test the biggest challenge for hiring entities will generally be satisfying Part B of the ABC test, because the business must show the worker performs work that is outside its usual course of business. The Court provided that when a retailer hires a plumber or electrician to perform maintenance work, that worker would properly be classified as an independent contractor because that person would be someone hired outside of the company's business. On the other hand, a clothing manufacturer that hires a work-at-home seamstress, or a bakery hiring a cake decorator for custom cakes, would not be able to classify those workers as independent contractors.
This ruling will undoubtedly have far-reaching implications for California businesses that hire workers as independent contractors because misclassifications can result in significant liability. Businesses that are considered members of the "gig-economy" may also be affected by the Court's ruling. Companies like Uber and Lyft depend on hiring workers as independent contractors to be successful. Under the ABC test, however, it is not clear whether those classifications are proper. The decision is unquestionably in favor of employment status. Businesses that hire independent contractors should seek legal advice to assess whether their worker classifications conform to the new ruling, and if not whether they are properly following the applicable Wage Orders.
