March 19, 2019

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California Supreme Court Adopts New Independent Contractor Analysis

On April 30, 2018, the California Supreme Court adopted a new test to establish independent contractor status pursuant to the California Industrial Wage Orders.  In Dynamex Operations W. v. Superior Court, 2018 WL 1999120 (Cal. Apr. 30, 2018), the court held that “the suffer or permit to work standard [in the California Wage Orders] properly applies to the question of whether a worker should be considered an employee or … an independent contractor[.]”  The court determined that the burden of proof in such a case is on the company to establish that the worker is an independent contractor.  In addition, to meet its burden, the company must establish each of the three factors in the “ABC test.” 

The New “ABC” Test

Unlike the traditional multi-factor balancing test that courts have used for decades when analyzing independent contractor classifications, an individual will be considered an employee under the ABC test unless  the hiring entity can satisfy all  three prongs:

(A)  Right to Control

The first prong of the ABC test is the traditional “right to control” standard.  A worker will be classified as an employee if “either as a matter of contractual right or in actual practice” s/he is subject to “the type and degree of control a business typically exercises over employees.”

(B)  Work Performed Outside Scope of Employer’s Business

To satisfy the second prong, the hiring entity must show that the individual’s work is outside the scope of the hiring entity’s usual business.  To clarify this standard, the court provided the following examples:

[O]n the one hand, when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee. On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company … the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees.

Entities in related industries should closely watch developments in this area for guidance on the application of the Dynamex decision and its impact on the classification of workers.  

(C)  Worker is Engaged In Independent Business

To satisfy the third prong, the hiring entity must show that the worker is engaged in an independently established business.  Evidence that a worker is engaged in an independent business includes “incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.”

Impact on Employers

Dynamex has changed the playing field regarding the classification of independent contractors in California.  A company that classifies workers as independent contractors and are   central to day-to-day operations of the business should be particularly concerned about this decision, as it may affect the viability of the classification within the business model. 

All California companies that utilize independent contractors should revisit their contractual arrangements and day-to-day business operations to evaluate the impact of Dynamex.

© Polsinelli PC, Polsinelli LLP in California

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About this Author

Anne Cherry Barnett, Attorney, Polsinelli Law Firm
Principal

With an eye toward being a valued resource and partner to clients, Anne Cherry Barnett approaches each matter with the goal of streamlining costly litigation and achieving the client’s objectives successfully and efficiently. Anne focuses her practice on employment matters and has represented clients of all sizes. She prides herself on providing sound and cutting edge legal strategies that consistently focus on the client’s bottom line as they navigate the complex labyrinth of California and Federal employment regulations. Anne has represented employers in single...

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Associate

Brian Morris is an associate in Polsinelli’s Labor and Employment Litigation practice. He received his J.D. from the New York University School of Law in 2011, where he was a Staff Editor for New York University Journal of Law and Liberty.

Our attorneys have extensive experience providing employers with cost-efficient advice and aggressive defenses on employment and labor law matters. We have represented Fortune 500 corporations and privately owned entrepreneurial firms, and were ranked by Chambers USA in Labor & Employment, May 2016. The practice was also rated as a Standout in both complex and everyday employment litigation in the 2017 BTI Litigation Outlook, based on a survey of more than 300 general counsel at companies with more than $1 billion in revenue.

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