14 Jun

California Supreme Court Tolls Death-Knell on Independent Contractor Classifications

by , on Articles

California Supreme Court Tolls Death-Knell on Independent Contractor Classifications

By: Carrie Battilega Luetzow, Special Counsel for Andrews Lagasse Branch + Bell LLP

To curtail the number of misclassified independent contractors, the California Supreme Court recently adopted a new test for determining whether a worker is an employee or an independent contractor for purposes of the Califoria wage orders.  

In a landmark case, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, No. S222732 (April 30, 2018), the high court rejected the prior Borella “totality of circumstances” test, which principally considered whether the hiring entity had the “right to control” the manner and means of performing the work; and secondarily, evaluated nine other factors to determine whether a worker is an independent contractor.

In place of the Borella test, the Dynamex court adopted the ABC test, finding the former was too complicated to apply, led to inconsistent results, and afforded employers great opportunity to evade its financial responsibilities by misclassifying workers as independent contractors.

What is the ABC Test?

The ABC test presumes the worker is an employee. This presumption now places the burden on the hiring entity/employer, unless the hiring entity can establish all of the following three factors:

  • that 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 such work and in fact; and
  • that the worker performs work that is outside the usual course of the hiring entity’s business; and
  • that 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.

What does Dynamex teach us about the ABC test?

The Dynamex court did not rule on whether the ABC test was actually met by Dynamex, because it was applying it for purposes of class certification only. However, in assessing class certification, the court provided guidance regarding the types of evidence and facts that will be persuasive in establishing each of the factors of the ABC test.

(A) Is the worker free from the control and direction of the hiring party?

Under Factor A, a worker who is subject to the type and degree of control a business “typically” exercises over employees is an employee. This generally means that a worker will be deemed an employee if the hiring entity generally controls the way in which the work is completed. To be classified as an independent contractor, the worker must have meaningful discretion over how he or she completes his or her own work, with minimal supervision from the hiring entity.

(B) Is the work outside the usual course of the hiring entity’s business?

The court stated that under this Factor B, to be an independent contractor, a worker should be reasonably viewed by others as working in the worker’s own independent business and not the business of the hiring entity. For example, in Dynamex, this factor weighed against for Dynamex, because Dynamex is a delivery service company and the plaintiffs (i.e., the workers that Dynamex classified as independent contractors) made Dynamex’s deliveries. The Dynamex court held that this was persuasive evidence that the plaintiffs performed work within the usual course of Dynamex’s business.

(C) Is the worker customarily engaged in an independently established business of the same nature as the work performed?

Factor C suggests an independent contractor is someone who independently has made the decision to go into business for himself or herself.  Signs of an independent business are: incorporation, licensure, advertisements, multiple customers, business cards; a separate business location; determining the business protocol for customers, record keeping and other procedures; and the opportunity for profit and loss. If an individual is labeled an independent contractor by the hiring entity with no evidence of an independent business, the court stated that that there is a “substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification.”  

What are the risks of misclassification?

The Dynamex court adopted the ABC test with the goal of increasing the number of California workers that are classified as employees for purposes of the California wage orders. The court stated that in recent years, misclassification of workers as independent contractors has become a “very serious” problem because it deprives governments of billions of dollars in tax revenue; denies millions of workers labor law protections to which they are entitled; and creates an unfair business advantage for businesses that misclassify their employees.  

Based on this ruling, governmental agencies will continue to increase enforcement efforts and courts will likely apply the ABC test in a manner that will broaden the number of employees and limit the number of independent contractors in California. Thus, the risks of misclassification for employers are perhaps higher than ever for California employers.

If a worker is misclassified as an independent contractor, the employer may be liable for significant damages, including: back pay for unpaid wages and overtime pay; waiting time penalties; penalties for failure to provide wage statements; civil tort liability for injured parties; lost benefits; additional penalties; and attorneys’ fees. In addition, the hiring entity may be required to pay unemployment insurance taxes, state employment tax and associated penalties

Employers who willfully misclassify their workers as independent contractors are subject to significant penalties (from $5,000-$25,000 for each violation) under California Labor Code section 226.8.

Andrews Lagasse Branch + Bell LLP anticipates that the courts will more readily find willful violations based on the Dynamex ruling. 

How to Prevent Against Misclassification:  

The Dynamex ruling represents a significant shift in California’s view of independent contractors. With the burden imposed on employers to establish that their independent contractors are properly classified, employers must take critical steps to ensure they are complying with the new law.

Employers should:

  • Review current Independent Contractor classifications to ensure independent contractors meet the Dynamex test for purposes of the California wage orders.
  • Review and revise Independent Contractor Agreements to comply with
  • Ensure hiring procedures are in place to protect against improper misclassification.

Andrews Lagasse Branch + Bell LLP can assist employers to comply with this stringent new law. For more information, please call Carrie Battilega Luetzow, Esq. at (858).703.8161 or Kelly Folger, Esq. at (858).461.6606.