The burden is on the hiring business to establish that the worker is an independent contractor. If an employer cannot meet all three criteria, the worker is considered an employee and not an independent contractor for purposes of California wage orders.

Things just got more difficult for businesses who use independent contractors in California. On April 30, 2018, the California Supreme Court issued a decision in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County, clarifying the test for ascertaining whether a worker is an independent contractor or employee. The result makes it more difficult to establish true independent contractor status. The decision follows a relatively pro-employee trend in the Golden State.

The Underlying Case

Drivers for Dynamex Operations West, Inc., a nationwide package and document delivery company, filed a complaint alleging Dynamex had misclassified its delivery drivers as independent contractors rather than employees. They claimed Dynamex violated the applicable California Industrial Welfare Commission wage order governing the transportation industry, as well as violations of various sections of the California Labor Code and unfair and unlawful business practices under California Business and Professions Code section 17200. In particular, they claimed that as true employees, they were eligible for overtime pay and meal and rest breaks.

The court had to determine which of multiple existing tests to apply to determine, for purposes of California Industrial Welfare Commission wage orders, whether a worker is an employee or independent contractor.

The ABC Test

The court unanimously adopted the “ABC test,” discarding the previous and more flexible standard used by California courts to determine employee status. The prior standard focused on the amount of control the entity exercised over the worker’s wages, hours and working conditions. Under that test, companies in some circumstances could more easily adapt particular positions to establish contractor status and avoid hiring workers as employees.

By adopting the ABC test, all workers are presumptively considered to be employees. Workers are considered independent contractors if all of these three conditions are satisfied:

1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the 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 that involved in the work performed.

The burden is on the hiring business to establish that the worker is an independent contractor. If an employer cannot meet all three criteria, the worker is considered an employee and not an independent contractor for purposes of California wage orders.

What This Means for Businesses

Although the case arose from a dispute involving drivers in the “gig economy,” the opinion from the state’s highest court is not limited to one particular industry—all companies who use contractors are affected. While the decision leaves room for interpreting the three conditions, the opinion will likely make it considerably harder for some businesses and organizations to justify independent contractor classifications. The opinion’s focus on industrial wage orders (and not employment laws arising from other sources) is unlikely to lessen the impact. The decision certainly makes it easier for some contractors to demonstrate misclassification. Because the consequences of misclassification are severe and often are subject to class actions, the case provides a wake-up call to those who have been avoiding the issue. Businesses should consider worker classification audits with the assistance of counsel.

For Further Information

If you have any questions about this Alert, please contact any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are in regular contact.

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