May 1, 2018

California Supreme Court Makes it More Difficult to Classify Workers as Independent Contractors

On April 30th, the California Supreme Court issued a unanimous opinion on how the Industrial Wage Orders govern independent contractor versus employer status in California.  The case will make it much more difficult for companies to prove that independent contractors are properly classified.

Companies engage independent contractors for a variety of reasons including avoidance of wage and hour obligations, taxes, and other obligations owed only to employees. Using independent contractors can promote workforce flexibility while saving substantial costs. However, the consequences for misclassifying an employee as a contractor can result in significant financial exposure, including liability for unpaid back pay and overtime, taxes, employee benefits and monetary penalties.

Since the 1989 S. G. Borello & Sons, Inc. v. Dep’t of Indus. Relations case, in California a flexible “multi-factor” or “economic realities” test usually determined whether a worker was properly classified as an employer or independent contractor.

However, yesterday in Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court adopted a substantially more narrow “ABC test” for assessing whether a worker is an employee or independent contractor.

The ABC test begins with a presumption of an employment relationship, which the company can only overcome by showing:

  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 such work and in fact;
  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 the work performed for the hiring entity.

This decision is one of the most significant California wage and hour cases in years. Businesses now have the burden of defending their classification of workers as independent contractors under a new rigid standard. California employers should reevaluate their independent contractor relationships to ensure they are compliant with new case law and mitigate exposure to costly misclassification litigation.