Do you use Independent Contractors?

Make sure they are properly classified under new game changing California Supreme Court decision.

By Sara Boyns

In April 2018, the California Supreme Court issued a game changing decision for many California businesses that use independent contractors. Historically, in determining whether a worker was an employee or an independent contractor, the Labor Commissioner, Internal Revenue Service, Employment Development Department, and courts applied a multi factor test. Under that test, for the last 29 years the principal factor in determining whether a worker was an independent contractor was “whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired.” Other factors were applied to determine if, on balance, a worker was an independent contractor or an employee.

In Dynamex Operations West, Inc. v. Superior Court (Lee), the Supreme Court of California adopted a new standard, the ABC test. Under the ABC test, the hiring entity must prove all of the following in classifying a worker as an independent contractor:

  1. That 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 for the performance of the work and in fact.
  2. That the worker performs work that is outside the usual course of the hiring entity’s business.
  3. That the worker is customarily engaged in an independently established trade, occupation, or business.

The hiring entity’s failure to prove any one of these three factors will be sufficient to establish that the worker is an employee, rather than an independent contractor, for purposes of California employment laws. Even if the parties agree to an independent contractor relationship, or the worker prefers to be an independent contractor, under California law the worker will not be an independent contractor unless all 3 factors are proven by the hiring entity.

In adopting the ABC test, the Court explained that all individuals who are reasonably viewed as providing services to a business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor, are employees. Workers whose roles are most clearly comparable to those of employees include individuals whose services are provided within the usual course of the business of the entity for which the work is performed and thus who would ordinarily be viewed by others as working in the hiring entity’s business and not as working, instead, in the worker’s own independent business.

Now what do I do? If your business uses independent contractors, you need to evaluate whether the workers will satisfy all of the factors in the ABC test. Many businesses will need to re-classify workers and convert independent contractors to employees. The risk of ignoring this new ABC test and misclassifying workers includes lawsuits by misclassified workers (including potential class actions) for wages, overtime, meal and rest periods, paid sick leave and other employee benefits, and audits and claims for back taxes by the Internal Revenue Service, Franchise Tax Board, and Employment Development Department.