California Makes it Harder for Companies to Classify Workers as Independent Contractors

In Dynamex Operations West, Inc. v. Superior Court, 2018 WL 1999120 (April 30, 2018), the California Supreme Court adopted a new, more restrictive standard for determining whether a worker is an employee under the California Wage Orders. The new standard presumes that workers are employees and places an affirmative burden on companies to prove that one classified as an independent contractor is free from the employer’s control and direction; performs work that is outside the companies’ core business; and customarily engages in an independently established trade, occupation or business.

The previous standard, known as the Borello test, had been in place since 1989 and was based on a multifactor test to determine the level of control the employer exercised over the worker that considered, among other factors, the worker’s skill, the method of payment by the hiring entity, and the nature of the business. Despite being used for nearly three decades, the court rejected it in Dynamex and instead relied on a standard commonly referred to in other jurisdictions as the “ABC” test to determine whether a worker is properly classified as an independent contractor.

Under the new “ABC” test, a worker will be considered an independent contractor only if the hiring entity can prove all three of the following:

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

Notably, the “ABC” test only applies to Industrial Welfare Commission Wage Orders. It does not apply to federal matters, or any other California state agencies.

Nonetheless, because the Industrial Welfare Commission Wage Orders cover most private industry workers in California, the Dynamex decision has a broad reach. Therefore, California employers – along with those based elsewhere who use workers in California that they classify as independent contractors – should promptly re-examine the relationship with those workers to determine if it satisfies the new ABC test. If not, the workers should be reclassified as employees to avoid potentially significant overtime pay and other related liabilities.