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New Classification Test Announced for California Independent Contractors

Labor & Employment Publications

On Monday, April 30, 2018, the California Supreme Court issued a landmark decision establishing the presumption that a worker is an employee in that state unless the employer meets a three-prong “ABC” test. The Court’s ruling in Dynamex v. Superior Court is a shift from the more flexible multi-factor test California courts have used since 1989 and now imposes an affirmative burden on businesses to prove that workers are properly classified as independent contractors.

Case Background

Dynamex is a nationwide delivery and same-day courier service with business centers in California. Prior to 2004, Dynamex classified its drivers and couriers as employees. However, in 2004, Dynamex changed its policies and contractual agreements and reclassified its drivers as independent contractors. Plaintiffs, two former drivers for Dynamex, first filed this lawsuit in 2005 alleging a violation of California law, shortly after the new policy and classification was adopted. They claimed that Dynamex violated California law by re-classifying the drivers as contractors, arguing that drivers continued to perform the same tasks, in the same manner, as they did previously as employees.

The plaintiffs sought to represent approximately 1,800 drivers who they claimed were misclassified as independent contractors. After nearly two decades of litigation, including multiple appeals, the case eventually found its way to the California Supreme Court. The issue before the Court was which standard to apply regarding the classification of independent contractors. The court focused primarily on two options: (1) continue to apply the flexible totality of the circumstances test adopted in the seminal California case, S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations; or (2) adopt a rigid ABC test that has been used in other states. The Court chose to do the latter.

The ABC Test

The Dynamex decision places the burden on California businesses to establish that the worker is an independent contractor. The Court reasoned that the ABC test was more faithful and consistent with the purpose of California wage orders. Under the ABC test, a worker is considered an employee unless the employer can establish all three of these prongs:

Prong A: The worker is “free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance and in fact.” This prong is similar to the prior totality of the circumstances test, which first looked to whether the entity serviced by the worker has the right to control the way (manner and means) the work is accomplished, before considering the additional factors. The Court also confirmed that the entity did not have to control the “precise manner or details of the work” in order for sufficient control to be found.

Prong B: The worker performs work outside the usual course of the hiring entity’s business. This prong includes almost any worker who engages in the same business as the hiring entity. To clarify this prong, the Court offered two contrasting examples:

  • A retail clothing storing hiring an electrician or plumber to address electrical or plumbing issues at their store was hiring someone free from their control, outside the usual course of business, and in an independent trade. The hiring entity was hiring an independent contractor.
  • However, a retail clothing store hiring a “work-at-home seamstress to make dresses from cloth and patterns supplied by the company that will [then] be sold by the company” was the hiring entity hiring an employee.

Prong 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.” The Court reasoned that when applying the term ‘independent contractor’ to an individual worker, this meant that the individual was one “who independently [] made the decision to go into business for himself or herself.” (emphasis in original). However, the good news is that a business does not have to prove that the worker took additional steps such as incorporation, licensure, etc.

While the Court articulated that lower courts could consider the ABC prongs in any order, the hiring entity must establish all three prongs to successfully classify a worker as an independent contractor.

Insights for Employers

Although this decision specifically addresses drivers in the transportation or delivery industry, it is expected to impact California employers across all industries, as the Court did not limit the ABC test to any specific industry. Therefore, all employers in California with workers classified as independent contractors should immediately review their classifications to ensure compliance with the Dynamex test. Misclassification of workers can result in significant monetary damages for wage and hour and other violations. While this decision drastically alters the worker classification test used for nearly three decades, it is not too surprising and is generally consistent with the continuing trend in California to place high burdens on employers.

It is too soon to tell how the lower courts in California will interpret the ABC test or whether this decision will influence how classifications are analyzed in other jurisdictions outside of California. Nevertheless, this new framework provides more guidance to California businesses and will inevitably affect the dynamic of the employee-employer relationship in the Golden State.