Independent Contractors in California—Misclassification Is Now “Easy as ABC”

by Blank Rome LLP
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California employers are facing a harsh new reality as a result of the state Supreme Court’s recent decision adopting a new test for determining whether a worker can properly be classified as an independent contractor (versus an employee) “for purposes of California wage orders,” which generally impose obligations on employers relating to non-exempt employees’ wages, hours, and working conditions like meal periods and rest breaks.

The underlying claims were brought by two delivery drivers alleging Dynamex, a nationwide same-day courier and delivery service, had improperly classified them and other “similarly situated” drivers as independent contractors. In relevant part, these drivers:

  • were paid a flat fee or percentage of the delivery fee received from the customer;
  • were generally free to set their own schedules;
  • were free to reject or accept jobs assigned by Dynamex;
  • used their own cell phones and vehicles for work;
  • were free to choose their own routes;
  • could perform work for other companies; and
  • were hired for an indefinite period of time.

Under most tests distinguishing independent contractors from employees, these facts would have weighed toward an independent contractor determination. However, in a densely-academic, 82-page opinion, the Court held that the “suffer or permit to work” definition of “employ” contained in the wage orders should replace the more flexible “right of control” test which has been used in California since 1989. Specifically, the Court adopted the “ABC” test as the proper way to distinguish employees from independent contractors. Under the ABC test:

“…a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (A) 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; (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 the hiring entity.”

Under the ABC test, there is no balancing of the facts—all three factors must be met to support an independent contractor determination. As stated by the Court, “[t]he hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of the wage order.”

For example, a worker would be properly classified as an independent contractor “only if the worker is the type of traditional independent contractor—such as an independent plumber or electrician—who would not reasonably have been viewed as working in the hiring business.” “On the other hand,” the Court said, “when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company,” or “when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees,” and not independent contractors.

While the Dynamex decision ostensibly, and somewhat technically, limits its holding to the “one specific context” of California’s wage orders and, by extension, only those individuals potentially subject to California’s wage orders, the practical reality is that it is administratively unmanageable for employers to classify workers as “employees” for some purposes (e.g., meal breaks and rest periods) and as “independent contractors” for other purposes (e.g., expense reimbursements and taxes). Thus, despite the Court’s limitation, the ruling likely has widespread implications on a number of employer obligations in California including social security and payroll taxes, unemployment insurance, business expenses, and workers’ compensation, to name a few.

Bottom line, it is now much more difficult to justify classifying someone as an independent contractor in California. If that person is generally performing services typically provided by your company and you exert any control or direction over those services, it is practically impossible to substantiate the independent contractor classification.

Dynamex is another example of the California Supreme Court’s expansion of worker rights and consistent rejection of federal concepts that provide narrower protections than California state law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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