On April 30, 2018, the California Supreme Court narrowed the class of workers who qualify as independent contractors. In the long-anticipated Dynamex Operations West, Inc., the Court rejected the flexible, multi-factor Borello test and adopted the stringent “ABC test” for determining when a worker is an independent contractor for the purposes of the wage orders adopted by California’s Industrial Welfare Commission.
The “ABC Test”
Under the “ABC test”, workers are presumed to be employees. A hiring entity can prove a worker is an independent contractor only if it can prove all of the following:
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 work and in fact; and
B) performs work that is outside the usual course of the hiring entity’s business; and
C) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The Court said California’s wage laws must be interpreted to protect both workers and competition among businesses but offered little guidance on applying these prongs. The Court explained that the A prong was similar to the common-law test and requires that the worker is free from the control an employer normally exerts over an employee. Then, departing from a more flexible standard followed by other jurisdictions, the Court made clear that a hiring entity cannot satisfy part (B) by showing only that the worker performs work physically outside the employer’s business. Instead, to satisfy the B prong, an employer must show that the work falls outside its usual course of business. So basically, the B prong bans hiring entities from utilizing independent contractors to supply their core services. Finally, an affirmative showing on the C prong requires an independent decision by the worker to go into business for her or himself.
This ruling increases the number of workers who are classified as employees and will likely affect California employers across all industries. Misclassification of workers can result in significant damages. In light of this ruling, California companies with independent contractors must reevaluate those relationships and make all necessary adjustments.