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California Supreme Court Adopts “ABC Test” to Evaluate Independent Contractor Status

Posted on 4 May 2018
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By Geoff Mohun, General Counsel and Chief Compliance Officer for iWorkGlobal.

A recent California Supreme Court decision has made it more challenging for businesses to classify workers as independent contractors.   In the case Dynamex Operations West, Inc. v. Superior Court, Cal., No. S222732 (April 30, 2018), the California Supreme Court adopted a rigid new standard for determining whether a worker is an employee or an independent contractor.  California will now apply the “ABC” test, which is considered the toughest analysis applied in determining whether a worker is properly classified as an independent contractor.

The ABC test is less open-ended than California’s long used Borello test, based upon the S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) decision.  The Dynamex case arose in 2005 and had been litigated for over twenty years.  In 2004, Dynamex Operations West converted its drivers from employees to independent contractors.  A law suit was filed against the company by a group of drivers acting as plaintiffs on behalf of over 1800 other Dynamex drivers engaged by the company as independent contractors.  The suit alleged that the drivers performed the same tasks as they had when they were classified as employees.  The California Supreme Court’s position in Dynamex was clear that it characterized misclassification of independent contractors as harmful and unfair to workers and generally not in the public’s best interest.

The ABC test presumes that all workers are employees and permits independent contractor classification of a worker only if the hiring business can prove all three of the following:

  1. 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
  2. That the worker performs work that is outside the usual course of the hiring entity’s business; and
  3. 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.

The Dynamex case applied to Industrial Welfare Commission Wage Orders and the court did not decide on the ABC test’s application to other wage and hour claims.  Although the Dynamex case involved delivery drivers and directly relates to the trucking and transportation industries, it is too early to tell how it will impact all businesses engaging independent contractors.

That said, California businesses working with independent contractors should expect more claims relating to their classification of independent contractors and be prepared to defend their classification when challenged.

The Dynamex decision could present significant problems for the growing number California businesses utilizing the increasing numbers of workers classified as “independent contractors” in this gig economy era.   Misclassification decisions may result in significant legal exposure (including, but not limited to, compliance with state and federal wage and hour regulations, payroll and other tax laws, workers compensation insurance).

As experts in independent contractor compliance and an authority in workforce management, iWorkGlobal shields companies from misclassification risks, in California and throughout the U.S. As part of our IC Compliance offering, we provide a comprehensive risk assessment and evaluation for each worker engagement, along with a clear path of action to keep our clients safe. Once workers are accurately classified, iWorkGlobal provides support services, such as serving as employer of record (for payrolled workers) or agent of record (for independent contractors), and ongoing risk assessments and mitigation. With iWorkGlobal, you confidently avoid misclassification and gain peace of mind as you focus on your business.

To learn more, visit www.iWorkGlobal.com/compliance.