In April 2018, the California Supreme Court adopted the ABC Test for independent contractors and explained how to distinguish them from employees. The move shocked employers and businesses across the state and has many wondering about the continuing viability of independent contractor business models in today’s growing “gig economy.” Only time will tell the reach of the rule in California employment law.
Court Announces New ABC Test for Independent Contractors in Dynamex Operations West
Since 1989, California courts have applied a multifactor balancing test announced in Borello Sons Inc. v. State Department of Industrial Relations to determine whether a worker is an employee or independent contractor under the state’s various employment laws. Courts determined employment status by considering 11 factors on a case-by-case basis.
That rule went out the window when the California Supreme Court handed down its opinion in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County. In Dynamex, the court rejected the decades old Borello test in favor of a strict three-part test to determine employment status. Under the new ABC test for independent contractors, businesses will find it much more difficult to prevail on a claim that a worker is an independent contractor.
The Dynamex Independent Contractors’ Claim
Dynamex West Operations, Inc. is a delivery service that operates in California. In 2004, the company announced that it was converting its delivery drivers from employees to independent contractors. As independent contractors, the drivers bore certain costs:
- Purchasing and maintaining their own vehicles and mobile phones;
- Paying for all expenses related to driving such as tolls and insurance; and
- Paying their own taxes and workers’ compensation insurance.
Drivers were free to set their own schedules and refuse individual assignments, but Dynamex obtained the clients, set the delivery rates, set the drivers’ compensation, and required the drivers to purchase and wear Dynamex shirts for work.
In 2005, one driver filed a class action suit against Dynamex, arguing that Dynamex had inappropriately classified him and the other delivery drivers as independent contractors. He sought, in part, overtime pay.
In its opinion, the California Supreme Court reviewed the history of worker classification cases and then broke with nearly 30 years of case law. Rejecting the Borello test, the court announced that the ABC test would apply to Industrial Welfare Commission (IWC) Wage Orders. As a result, the court broadened the definition of “employee” in the context of Wage Order #9, which pertains to transportation workers, making the Dynamex delivery drivers employees instead of independent contractors.
What Is the ABC Test for Independent Contractors?
Under the ABC test for independent contractors, the court presumes that a worker is an employee. To overcome the presumption, the hiring business must demonstrate each of three criteria:
- That the worker is free from the hiring business’s control and direction in connection with the work performed, both according to the parties’ contract or agreement and in fact;
- That the worker also performs work that is outside the usual course of the hirer’s business; and
- That the worker is normally engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hirer’s entity.
The new rule is stricter than the multifactor test under Borello. While the strictness is intended to make the rule easier to apply, it also makes it harder for hirers to overcome the presumption that a worker is an employee.
Why Does Employment Status Matter to Employers?
How a business classifies its workers determines what laws apply to many working conditions. Federal and state laws regulate the work conditions of employees on issues such as wage and hour and safety laws. Coverage for independent contractors may vary from that provided to employees.
In addition, the misclassification of workers as independent contractors instead of employees can result in consequences that have a major financial impact on a California hirer. For employees, businesses must pay and/or withhold federal Social Security and payroll taxes, unemployment insurance taxes, and workers’ compensation insurance premiums.
Businesses that misclassify employees as independent contractors can be ordered to pay those costs retroactively, which can be costly. A California hirer’s worker misclassification can also subject the business to interest and civil penalties between $5,000 and $25,000 per violation in addition to tax audits by the California Employment Development Department (EDD). Criminal charges under federal and state law are also possible.
Does the ABC Test for Independent Contractors Apply to All California Employment Laws?
The court limited the holding in Dynamex to IWC Wage Orders and acknowledged that different tests may apply to a single worker under each of the different areas of employment law. That appears to preclude application of the new California independent contractor test outside of IWC Wage Orders. Indeed, since Dynamex, the 4th District Court of Appeal has refused to apply the ABC test to questions of joint employment in Curry v. Equilon Enterprises, LLC.
Still, many questions remain as to how the new ABC rule for independent contractors will play out in the Golden State. Companies with independent contractor business models like Uber and Lyft may have a hard time overcoming the presumption of employee status in the Wage Order context. The new test appears to prohibit an independent contractor business model where workers perform only duties that are within the “usual course of the hiring entity’s business.” Application of the test yields different results depending on whether the court would define the ride-sharing companies as providing transportation services versus technology platforms.
Similarly, Dynamex makes no mention of the franchise business model, but that model is sufficiently similar to the independent contractor format to raise the question whether the court would apply the ABC test for independent contractors in that realm as well.
Do You Need Help Navigating the ABC Independent Contractor Test?
If you’re trying to figure out how to proceed after Dynamex, you’re not alone. For a careful analysis of how the ABC test for independent contractors test may apply to your business model, call Rosana Ortega, an experienced employment and labor lawyer who has successfully helped employers navigate California labor, employment, and business laws for more than 20 years. Call Rosana at (858) 794-0098 or email her at rortega@ortegabusinesslaw.com.
