CA Announces New ABC Test for Employers
On April 30, 2018, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court, No. S222732, in which the court heightened the decades-old test for determining if a worker is an employee or an independent contractor, applying a more rigid, even more worker-friendly test.
Previously, the test used for classifying workers as employees or independent contractors considered multiple factors without a particular emphasis on, or requirement of, any one factor.
The new test makes it harder for companies to classify workers as independent contractors by requiring three factors to occur in conjunction as a threshold test for determining contractor status. Under the new test, the employer or “principal,” as the hiring entity is called in relation to a contractor, now bears the burden of establishing all of the following "ABC" factors to prove the worker is an independent contractor and not an employee:
- A - that 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 and in fact; and
- B - that the worker performs work that is outside the usual course of the hiring entity's business; and
- C - that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work he or she performed for the principal.
An employer's failure to establish any of the three factors will result in a determination that the worker is an employee as a matter of law.
The Court's ruling specifically applies to claims asserted under the IWC Wage Orders, which impose obligations related to minimum wages, overtime, and required meal and rest breaks. It is unclear how the case applies to claims arising under other statutes.
What does this mean for employers?
With the constant influx of class action lawsuits regarding independent contractor status, companies doing business in California that treat some of its workers as independent contractors should immediately review those relationships under the ABC test. Moving forward, employers must use even more scrutiny when examining their use of independent contractors, including any independent contractor agreements, to ensure compliance with the new standard. It also means that the vast majority of people working for a company will be considered employees if they perform work that is in the usual course of business of the company, even if those people clearly have their own business and act autonomously in their day-to-day duties. Therefore, employers should seriously reconsider classifying virtually all of their individual vendors as employees or at least realize the peril of penalties if they do not.
Please feel free to contact us at firstname.lastname@example.org for more information and to assist you in evaluating your use of independent contractors, or to evaluate any risk exposure.
You can read the Opinion here.
Author: Kymberly LeGolvan, Associate.
This article has been prepared for general informational purposes only and does not constitute advertising, solicitation, or legal advice. If you have questions about a particular matter, please contact the Maier Law Group directly.