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.