By Stephen W. Pearson and Lindsey Berg-James
Attorneys with Noland, Hamerly, Etienne & Hoss
Diverging from decades-old precedent, the California Supreme Court changed the test for determining whether a worker is an independent contractor or an employee in its April 30, 2018 decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County. Prior to this decision, courts applied the nine-prong test set forth in the 1989 Borello case, the most important prong being whether the employer had the right to control the manner by which the worker performed his or her job. In making that determination, courts traditionally looked at factors such as: (1) the employer’s right to terminate the worker without cause; (2) whether the worker was supervised by the employer; (3) which party supplied the necessary tools and equipment to perform the job; (4) how the worker was paid; and (5) the skills required to perform the particular job.
The Supreme Court in Dynamex rejected this traditional “control” test and adopted what the Court described as a “clearer” test that should be applied to determine whether a person providing services should be treated as an employee, with all the benefits that flow from that classification, or as an independent contractor, providing services outside of an employment relationship. The court adopted a new “ABC” test to make that distinction.
Under the ABC test, all workers are presumed to be employees unless the employer can demonstrate that the worker satisfies all three of the following conditions:
(A) the worker is “free from control and direction” of the hiring entity;
(B) the worker “performs work that is outside the usual course” of the company’s business;
(C) the worker is “customarily engaged in [his or her own] independently established” trade,
occupation, profession, or business.
If an employer fails to prove any of the three elements of the ABC test a worker will be determined to be an employee and not an independent contractor. In adopting the ABC test, the Supreme Court noted that by being presumptively classified as employees, workers will have the benefits and protections of California’s Wage Orders and companies will be protected from competitors who attempt to save costs by ignoring their obligations under the Wage Orders.
The ABC test significantly broadens the scope of workers who will be treated as employees rather than independent contractors and increases the chance that employers will have misclassified certain workers. The Dynamex decision does not make clear whether this test applies retroactively or prospectively, which creates an opportunity for workers to assert retroactive claims for wage and hour violations for work performed before the decision was published.
Because misclassifying workers as independent contractors comes with significant financial exposure, companies are encouraged to review their independent contractor relationships and agreements to determine whether those workers are in fact employees under the new ABC test.
© 2018 Noland, Hamerly, Etienne & Hoss
This article is intended to address topics of general interest and should not be construed as legal advice.