In late April 2018, a unanimous California Supreme Court in DYNAMEX OPERATIONS WEST, INC., v. THE SUPERIOR COURT OF LOS ANGELES COUNTY, http://www.courts.ca.gov/opinions/documents/S222732.PDF established a new test for classifying workers as independent contractors, with significant implications for all industries. Although the case is focused on the tech industry, the broad test is applicable for all companies doing business in California.

The California Supreme Court laid out the multi-factor “ABC Test,” which presumptively considers all workers to be employees and the definition of employee is to be interpreted broadly, so that California’s wage protections cover all workers who would ordinarily be viewed as “working” in the company that contracted with them. The “ABC Test” permits an independent contractor classification only if the hiring company can show that all of the following conditions are met:

A.   The worker is free from control or direction of the hiring entity over how to perform the work, both under the contract for the performance of the work and in fact;

B.   The service is outside the company’s usual course of business or outside of all the places of business for which the service is performed; and

C.   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.

This new framework makes it significantly more difficult for companies to classify workers as independent contractors.

Part A of the test is not new, but Parts B and C may present unique challenges. So, if you are a restaurant and hire a plumber, it would not be difficult in meeting the test. But if the same restaurant hires a chef, the test becomes more difficult.  Similarly, if you are a transportation company and hire a plumber for your facility, the test is easy to meet. But if you hire a driver or dispatcher as an independent contractor, under this new test, you may be unable to prove that individual is not an employee.

This court decision places the burden on the business to prove a worker is an independent contractor rather than an employee. Failing to prove any one of these criteria is enough to establish that the worker is an employee, and not an excluded independent contractor.

Please note that a similar test is also used in some other jurisdictions, including New Jersey and Massachusetts.

We recommend that all companies with employees in California reevaluate their current employee classifications to ensure that they are compliant under the ABC Test.

For further information please contact Audra Pavilcius Karalius at Boodell & Domanskis, LLC.