Thanks to a new court ruling, companies, large and small, that do business in California may need to review their treatment of employees and independent contractors.
When someone performs work for a business, they can either be an employee or an independent contractor. Determining which of those categories a worker falls into is not always as simple as it seems. There’s a misconception that if a company calls someone a “contractor,” or has them sign an independent contractor agreement, that person is not an employee, and therefore the employer is exempt from certain wage, hour, and working condition regulations. That’s not the case – whether or not someone should be classified as an employee is instead based on a 12-factor test.
Or at least that was the case until April 30, 2018, when the California Supreme Court issued its ruling in Dynamex Operations West, Inc. v. Superior Court. (Clicking that link will allow you to download the full court opinion.) The court in Dynamex threw out the 12-factor test (in some circumstances) and replaced it with an ABC test.
The old 12-factor test, a version of which can be found in the California Employment Development Department’s Employment Determination Guide, was familiar to many employees. And it may still apply – the Dynamex ruling didn’t explicitly state that it applies to all employment/independent contractor questions in California, which means it may only apply to California’s Industrial Welfare Commission Wage Orders regulating wages, hours, and working conditions.
All of which is to say that we don’t know with perfect certainty exactly which, if any, employment/independent contractor questions may still be resolved under the old test.
This can all be a bit confusing, so let’s take a look at the new ABC test and see what we can understand.
The key paragraph in Dynamex reads as follows:
The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work 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 that involved in the work performed.
Note that, for a worker to be properly classified as an independent contractor, all three of the ABC prongs must be satisfied. Under the old 12-factor test, the different factors could be weighed separately. Now, an employer needs to satisfy all of the ABC test or else risk having their purported contractor be classified as an employee.
Taking each of the prongs individually:
A) That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact.
It’s not always clear whether a worker is free from the control and direction of the business – the facts of the individual case will come into play. But take note of the part after the comma – courts and regulators will not just look at an independent contractor agreement; they will, instead, consider how the actual work relationship occurs. So even a perfectly written independent contractor agreement won’t help a company if it controls and directs its contractors as if they were employees.
B) That the worker performs work that is outside the usual course of the hiring entity’s business.
This reflects one of the factors in the 12-factor test. As expressed by the EDD:
Work which is a necessary part of the regular trade or business is normally done by employees. For example, a sales clerk is selling shoes in a shoe store. A shoe store owner could not operate without sales clerks to sell shoes. On the other hand, a plumber engaged to fix the pipes in the bathroom of the store is performing a service on a onetime or occasional basis that is not an essential part of the purpose of the business enterprise. A certified public accountant engaged to prepare tax returns and financial statements for the business would also be an example of an independent contractor.
Now, however, this is not just one out of 12 factors, but an essential element that must be satisfied. So beware, shoe store owners who want to classify their salespeople as independent contractors.
This could have a huge effect on tech companies and others in the “gig economy.” An article in the LA Times reporting on the Dynamex decision stated that Michael Chasalow, a professor at the USC Gould School of Law believed that, following Dynamex, “drivers for Uber and Lyft should be classified as employees because those companies’ usual course of business is providing rides.” (Quoting the LA Times story, not Chasalow directly.)
C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
This final factor will come into play, for example, when a company wants to “reclassify” its existing employees as independent contractors. Were those people really engaged in an independently established business? Probably not.
Let’s say a business wants to do some marketing through an independent contractor. If they engage someone who already has a marketing business, particularly one with multiple other clients, they’re probably going to satisfy element C of the ABC test. If, on the other hand, the company goes to its existing marketing employee and says “hey, marketing employee, good news: you’re now an independent contractor providing marketing services,” element C will probably not be satisfied.
Remember, the new ABC test may not apply under all circumstances. Some aspects of employment law that may still rely on the old 12-factor test include claims for expense reimbursement and workers’ compensation issues. It remains to be seen, based on future litigation and rulemaking, how far the ABC test will go.
That said, companies doing business in California should take the time to review their treatment of employees and independent contractors before they get hit with a wage, hour, and working conditions claim under the new law – the safest, most prudent route is to make sure that all of a company’s independent contractor relationships would satisfy the ABC test.