California Supreme Court Issues New Classification Guidelines for Independent Contractors
On April 30, 2018, the California Supreme Court issued its long-awaited opinion in Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903, clarifying the standard for determining whether workers in California should be classified as employees or as independent contractors for purposes of the wage orders adopted by California’s Industrial Welfare Commission (“IWC”). In so doing, the court held that there is a presumption that individuals are employees, and that an entity classifying an individual as an independent contractor bears the burden of establishing that such a classification is proper under the “ABC test” used in some other jurisdictions.
Depending on the applicable statute or regulation, California has a number of different definitions for whether an individual is considered an entity’s employee. This has led to confusion concerning what test should be applied. In Dynamex, the court concluded that one of these more broad definitions – “suffer or permit to work” – may be relied upon in evaluating whether a worker is an employee for purposes of the obligations imposed by the wage order. But the court held that the Court of Appeal had gone too far in providing a literal interpretation of “suffer or permit to work” that would encompass virtually anyone who provided services.
The court held that it is the burden of the hiring entity to establish that a worker is an independent contractor who was not intended to be included within the applicable wage order’s coverage. To meet this burden, the hiring entity must establish each of the following three factors, commonly known as the “ABC test”:
(A) that the worker is free from the control and direction of the hiring entity 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 the work performed.
For example, Chief Justice Cantil-Sakauye in the 7-0 opinion said, a store that hires an outside plumber to fix a leak, or an electrician to install a new line, could consider them contractors. But a clothing manufacturer that hires seamstresses who work at home to make dresses that the company will sell has hired them to perform work in its usual line of business and must pay them as employees.
The court concluded that the “suffer or permit to work definition is a term of art that cannot be interpreted literally in a manner that would encompass within the employee category the type of individual workers . . . who have traditionally been viewed as genuine independent contractors who are working only in their own independent business.”
What This Means for Employers:
Following Dynamex, entities doing business in California that treat some workers as independent contractors will want to review their relationship under the “ABC test” to determine whether any or all such workers should be reclassified. Contact Barsamian & Moody for assistance in conducting your review of employee and independent contractor classifications.
The goal of this article is to provide employers with current labor and employment law information. The contents should neither be interpreted as, nor construed as legal advice or opinion. The reader should consult with Barsamian & Moody at (559) 248-2360 for individual responses to questions or concerns regarding any given situation.