The New “ABC’s” of Independent Contractor Status

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As California employers are well aware, the issue of whether a worker is properly classified as an “employee” or an “independent contractor” has long been a concern.  Misclassification can lead to potential legal exposure for claims of minimum wage, overtime, missed meals and breaks and failure to provide legally required wage statements, among other potential claims.

The issue has now been addressed by the California Supreme Court in its decision in Dynamex Operations West, Inc. v. Superior Court.  The decision, which the court believes provided clarity and consistency in the distinction between employees and independent contractors, makes it more difficult to properly classify workers as independent contractors.

Old Test:  Right To Control – Multi Factor Common Law Test

For several decades, California courts have used a multi-factor, common-law test to determine whether an individual performing services could be classified as an independent contractor.  The test primarily involved determining whether who had the right to control the manner and means of accomplishing the result desired — the worker or the company? In addition 9 other factors were considered,  which factors were given varying weight, depending on the circumstances.

New Test:  3 Prong “ABC” Test

The Court, in deciding the Dynamex case, brought by delivery drivers who were classified as independent contracts, relied on a standard referred to in other jurisdictions as the “ABC” test. Under the ABC test, all workers are presumed to be employees unless the hiring business demonstrates that the worker satisfies each of three conditions:

(A)       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 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 new test is based upon the IWC (Industrial Welfare Commission) Wage Orders and the California specific definition of “employee” and “employer” as contained in the Wage Orders which define employees as those who “suffer to work” and employers as those who “permit to work.”

The Court limited its ruling to claims arising under the wage order, as neither party had sought review of the appropriate standard for claims arising under the Labor Code or other statutes. However, it is believed that moving forward the Dynamex  holding will replace all other tests to determine whether a California based worker has been correctly classified as an independent contractor because the decision relies upon the definitions contained in the Wage Orders (which cover all California employees).

What Does This Ruling Mean for California Employers? 

All workers are now presumed to be employees; however, this is a “rebuttable” presumption depending on the circumstances and the application of the ABC factors.

In order for a worker to be classified as an independent contractor, employers must demonstrate that the worker satisfies all three “ABC” factors and that each “ABC” factor remains satisfied throughout the relationship.

Workers can file claims with the Division of Labor Standards Enforcement (DLSE) or “Labor Commissioner” or can file a lawsuit for a claim of misclassification with the potential for liability for a variety of claims.

In addition, employers could be subjected to payroll tax audits conducted by the California Employment Development Department (EDD) where it would be the company’s burden to establish that every worker (going back three years) was properly classified as an independent contractor.

What Should I Do Now?
  • Review any existing independent contractor relationships and independent contractor agreement to ensure compliance with the ABC test;
  • Any worker not meeting the above tests should be re-classified and a determination made as to how to remedy potential exposure for the previous misclassification;
  • Be cautious when engaging workers as independent contractors, even if they have their own business license and maintain their own insurance as these may only meet the “C” part of the ABC test;
  • If the work is only part time or for a short duration, consider using workers through a temporary employment agency to avoid the need to undertake interviewing and completing your new hire process.
This Newsletter is intended as a brief summary of employment law.  While every effort has been made to ensure the accuracy of the information contained herein, it is not intended to serve as “legal advice,” or to establish an attorney-client relationship.  If additional information is needed on any of the topics contained herein, please contact our office. All rights reserved.  ©2018.