California Supreme Court Narrows Rule for Independent Contractors Forcing Many Business to Reclassify Workers as Employees

May 5, 2018

On April 30, 2018, the California Supreme Court sent shock waves through businesses using independent Contractors.  The Court substantially narrowed the existing 30 year old rule for classifying workers as independent contractors under California wage-hour law. In Dynamex Operations West, Inc., the California Supreme Court adopted the “ABC test” which greatly restricts when a worker qualifies as an independent contractor.

Under the ABC test, it is presumed that all workers should be classified as employees. The hiring business can show that a worker qualifies as an independent contractor only if the business can show that the worker:

1. is free from the control and direction of the hiring business in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
2. performs work that is outside the usual course of the hiring entity’s business; and
3. Is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

A.  Is your worker free from control and direction by the company?  Does the hiring company set requirements for performance of the worker's job?  Or, is the worker free to set their own schedule, work without supervision, purchase for themselves all materials used?  To meet part A of the test, the worker must be free to be in control of their own performance.

B.  Is your worker performing work that is outside the usual course of your business?  For example, a worker is not an employee “when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line” because the “services of the plumber or electrician are not part of the store’s usual course of business.”  However, “when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company,” or “when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes,” the workers are clearly performing work that is within the hiring company's usual course of business.

C.  Is your worker customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed?  The classification of an “independent contractor” has generally been understood to refer to an individual who “has independently chosen the burdens and benefits of self-employment.”  The worker must have taken “the usual steps to establish and promote his or her independent business,” through, for example, “incorporation [of business], licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.”

The business bears the burden of proof to prove that a worker is correctly classified as an independent contractor.  Mis-classifying a worker as a independent contractor can have substantial monetary impacts to your business.  For instance, your business is responsible for paying federal social security and payroll taxes, unemployment insurance taxes and state employment taxes as well as providing workers compensation insurance for the misclassified employee.  Further, your business could face large civil penalties under Labor Code section 226.8, which imposes penalties from $5,000.00 to $25,000.00 for each violation.

If your business uses the services of independent contractors, contact Kristina Reed to discuss whether your independent contractor is correctly classified.