CASE STUDY: Beware the New Test in California—The ABCs of Independent Contractors

August 2018

by Roger Mason, Esq., and Rachael E. Brown, Esq., Sweeney, Mason, Wilson & Bosomworth

On April 30, 2018, the California Supreme Court issued a seminal decision in Dynamex Operations West, Inc. v. Superior Court adopting a new legal standard for determining whether a worker is an employee or an independent contractor. In addition to changing the definition of who is considered an employee, this decision clearly imposes an affirmative burden on the hiring entity to prove that independent contractors are properly classified as such.

Under the Court’s new “ABC” test, a worker is presumptively considered an employee under the California Wage Orders unless the putative employer can establish each of the following three elements:

  1. The worker is free from the direction and control 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; and
  3. 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.

Prong A is akin to the common law standard which examines whether the hiring entity has the right to control the manner and means of accomplishing the work at issue. This element requires the company to prove that the worker is free of the control a company typically exercises over its employees.

The most radical prong is Prong B—that the work performed is different and distinct than the company’s usual business. The court uses the example of a retail store that hires a plumber to repair a leak or an electrician to install a new electrical line. Such services are not part of the store’s usual business and as a result, the store would be able to demonstrate independent contractor status. By contrast, a clothing manufacturer that hires a work-at-home seamstress, or a bakery that hires a cake decorator, would typically not be able to make such a demonstration, since the work is part of the company’s usual business operations and accordingly, the worker’s role is more akin to that of an employee than that of an independent contractor.

Prong C seeks to identify workers who have created their own business independent from the business of the putative employer. This can be established by things such as the worker’s “incorporation, licensure, advertisements, [or] routine offerings to provide the services of the independent business to the public or to a number of potential customers.” If a worker has independently made the decision to go into business for themselves, they will likely satisfy this third prong. If, on the other hand, they are “simply designated as an independent contractor by unilateral action of a hiring entity,” there is significant risk the worker will be deemed an employee.

Misclassification of employees as independent contractors can result in significant liability for companies. Labor Code section 226.8 provides for penalties as high as $25,000 per violation. In addition, payroll tax, workers’ compensation premiums, overtime, and unemployment benefits are implicated. Prior to Dynamex, determining whether or not a worker was properly classified as independent contractor was particularly challenging, as a myriad of factors were examined, each afforded varying weight depending on the applicable analytical framework being used to evaluate the classification. Companies should immediately conduct a thorough evaluation of all workers currently classified as independent contractors to determine whether they are properly classified under the new legal standard.

You MUST be aware of this new law and its potential consequences on classification.  If you have any specific questions or would like more details, please do not hesitate to call our office and one of our experienced employment law attorneys will be happy to assist you.

Roger M. Mason is a shareholder with Sweeney, Mason, Wilson & Bosomworth, Los Gatos, Calif.  Since 1982, Mason has focused on labor and employment law, both transactional and litigation.  He has successfully represented businesses in multiple aspects of employment and labor law issues through negotiations, strikes. pickets, disputes, mediations, arbitrations and trials. He can be reached at (408) 356-3000 or rmason@smwb.com. Rachael Brown assists her clients in a variety of litigation matters, focusing primarily on employment disputes. She can be reached at (408) 356-3000 or REB@smwb.com.

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