Benefit News

California Supreme Court Creates New Independent Contractor Classification Test

May 24, 2018

There is a new standard for determining whether workers who are subject to California wage orders should be classified as employees or independent contractors. On April 30, in the case of Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County, the California Supreme Court adopted what is commonly referred to as the "ABC Test." This standard, which is applied in several other jurisdictions throughout the country, including Massachusetts, replaces the "multifactor" test that had been previously confirmed by the California Supreme Court in a 1989 decision, S.G. Borello & Sons, Inc. v. Department of Industrial Relations.

The ABC Test

The ABC Test applies to claims brought under California's wage orders. Wage orders impose obligations on employers relating to minimum wage requirements, maximum working hours, and certain basic working conditions, such as minimally required meal and rest breaks. Workers who can be classified as independent contractors are not subject to the work order obligations. For example, most California employers in the transportation industry are governed by Industrial Welfare Commission Wage Order No. 9, and thus, are subject to the new standard.

Under the ABC Test, a worker may properly be considered an independent contractor for purposes of applying California wage orders only if the hiring entity is able to establish that:

    (A) 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;

    (B) The worker performs work that is outside the usual course of the hiring entity's business; and

    (C) 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.

As stated above, prior to adopting the ABC Test, California courts relied on a multi-factor test that was set forth in the Borello case. The multi-factor test takes into consideration various factors, none of which are necessarily determinative in a decision to classify the worker as an employee or independent contractor.

Impact To California Employers

The task of classifying workers as either employees or independent contractors has long been a difficult one for employers. Claims resulting from misclassification of workers has produced countless litigation over the years. Furthermore, courts throughout the country have had a difficult time developing a consistent standard to assist employers.

The good news is that the ABC Test provides employers with more clarity and may be easier to apply than the multi-factor test. The downside is that all three criteria must be satisfied for a worker to be classified as an independent contractor. This makes it more difficult to classify a worker as an independent contractor, as the test creates a presumption that a worker is classified as an employee. In particular, employers may have a difficult time establishing the second requirement above. Even if they can meet the first and third requirements, if the worker is hired to perform services that are part of the usual business of the employer, that worker must be classified as an employee.

More Information

The California Supreme Court ruling in the Dynamex case can be found at http://www.courts.ca.gov/opinions/documents/S222732.PDF.

For additional information, please contact your Burnham Benefits Consultant or Burnham Benefits at 949-833-2983 or inquiries@burnhambenefits.com.


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