United States: California Supreme Court Adopts Stricter Test For Independent Contractor Status Under The Wage Orders

On April 30, 2018, in Dynamex Operations v. Superior Court, the California Supreme Court drastically altered the applicable standard used for the past three decades to evaluate a worker's proper classification as an employee or independent contractor. The new and more stringent classification test, commonly called the "ABC Test," presumes workers are employees as opposed to independent contractors, unless the employer can prove that the following three factors are met: 1) the worker is free from the control and direction of the presumed employer in connection with the work performed, both under the contract and in fact, and (2) the worker performs work outside the usual course of the presumed employer's business, and (3) the worker is "customarily engaged" in an independently established trade, occupation, or business as the work he or she is performing for the presumed employer.

I. Overview of the Prior Independent Contractor v. Employee Test in California (The Borello Test)

Prior to Dynamex, the reigning approach to evaluating classification was the "Borello Test" derived from the 1989 case, S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations. The California Supreme Court in Borello considered whether farmworkers were appropriately classified as independent contractors and settled on a multi-factor approach which collectively weighed all criteria to render a classification. The most important factor was whether the purported employer had the right to control workers claiming employee status. Courts were also to consider a number of secondary factors, including: (1) whether the person performing work was engaged in an occupation or business that was distinct from that of the company; (2) whether the work was part of the company's regular business; (3) whether the company or the worker supplied the equipment, tools, and the place for the person doing the work; (4) the worker's financial investment in the equipment or materials required to perform the work; (5) the skill required in the particular occupation; (6) the kind of occupation, with reference to whether, in the locality, the work was usually done under the company's direction or by a specialist without supervision; (7) the worker's opportunity for profit or loss depending on his or her own managerial skill; (8) how long the services were to be performed; (9) the degree of permanence of the working relationship; (10) the payment method, whether by time or by the job; and (11) whether the parties believed they were creating an employer/employee relationship. 

II. The Court in Dynamex Adopts the "ABC Test"

California's Wage Orders have three alternative definitions of the term "employ": (a) to exercise control over the wages, hours, or working conditions; (b) to suffer or permit to work; or (c) to engage, thereby creating a common law employment relationship. The California Supreme Court in Dynamex emphasized that the "suffer or permit to work" language is purposefully broad, and ultimately renders more workers employees as opposed to independent contractors. The Court found that Borello's multi-factor, non-conclusive test was too broad and indeterminate. Instead, the Court approved the use of the "ABC Test" used by sister-state jurisdictions, to define the "suffer or permit to work" language, and thus to ultimately differentiate independent contractors from employees in claims arising under the wage orders.

The three-part "ABC Test" presumes workers are employees unless the presumed employer establishes that: (1) the worker is free from the control and direction of the presumed employer in connection with the work performed, both under the contract and in fact, and (2) the worker performs work outside the usual course of the presumed employer's business, and (3) the worker is "customarily engaged" in an independently established trade, occupation or business as the work he or she is performing for the presumed employer.

Unlike the Borello test, the more structured and concise "ABC Test" requires that each of the three conditions be satisfied for a worker to be deemed an independent contractor. Notably, the Court declined to decide whether the ABC Test extends to claims not arising under the Wage Orders, so at present the Borello Test appears to be the appropriate test for wage and hour claims.

III. Future Implications

The new, more concise test ultimately raises new hurdles for employers looking to classify workers as independent contractors. It also creates the prospect of a worker being deemed an employee for purposes of claims under the wage orders and an independent contractor for purposes of claims under the Labor Code, since the Court declined to decide whether the new "ABC Test" applies to claims not arising under the wage orders.

More individuals will be classified as employees due to the underlying presumption to the "ABC Test." This will result in a heavier cost of doing business in California, as employers will be forced to comply with California wage and hour laws for a greater percentage of their workforce. Employers will further be forced to pay for workers' compensation insurance for a much higher percentage of their workforce, and will also need to comply with applicable state and federal tax requirements for a larger portion of workers.

While this decision will ultimately be more costly to employers, it may also provide much more clarity on classification in the future. As independent contractor classifications have been heavily challenged in California wage and hour cases, companies should review their independent contractor classification policies to ensure compliance with the new standard.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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