The California Supreme Court recently published an opinion that describes a new independent contractor test that is broader than the current independent contractor test. The “Borello” multi-factor test has been applied for decades, and this new test makes it harder for businesses to properly classify a worker as an independent contractor. This opinion will affect many businesses that hire independent contractors within the State of California. The main take away from this opinion, Dynamex Operations W. v. Super. Ct., Cal. is this:
There is a new independent contractor test for purposes of the obligations imposed by a wage order.
Here is a breakdown to help understand the preceding statement:
- What are wage orders? In California, employment laws are spelled out in different places, including statutes, case law, and wage orders. This case specifically addresses the obligations that are imposed on employers by the wage orders that apply to different industries. These wage orders address issues such as the payment of wages (minimum wage), regulating meal and rest breaks, and the number of hours worked (overtime pay), for example. Since these wage orders only apply to employees, the question becomes who would be considered an employee (to whom the wage orders apply) versus an independent contractor (to whom the wage orders do not apply). That is precisely the question that the Supreme Court addressed in Dynamex. You may find the wage order applicable to your specific industry here: https://www.dir.ca.gov/iwc/wageorderindustries.htm
- What is the new independent contractor test? In Dynamex the Supreme Court held that the appropriate test of whether someone is an employee or an independent contractor under an applicable wage order is the “ABC” test. Under this new independent contractor test, a worker is properly considered an independent contractor to whom the wage order does not apply if the hiring entity establishes: (A) that the worker is free from 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. It should be noted that the Court specifically stated that the assumption is that anyone providing services is an employee unless the hiring entity is able to establish all 3 parts of the new independent contractor test.
Part A – Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
Under this part, the Court noted that if the contract and/or actual practice result in the company exercising the type and degree of control it would typically exercise over employees then the worker is treated as an employee. The Court offered the following examples to assist in analyzing this part.
- In Western Ports v. Employment Sec. Dept. the company failed to establish that truck driver was free from its control within the meaning of part A of the ABC test, where the company required drivers to keep their trucks clean, to obtain the company’s permission before transporting passengers, to go to the company’s dispatch center to obtain assignments not scheduled in advance, and could terminate drivers’ services for tardiness, failure to contact the dispatch unit, or any violation of the company’s written policy.
- Alternatively, in Great N. Constr., Inc. v. Dept. of Labor, a construction company established that a worker who specialized in historic reconstruction was sufficiently free of the company’s control to satisfy part A of the ABC test, where the worker set his own schedule, worked without supervision, purchased all materials he used on his own business credit card, and had declined an offer of employment proffered by the company because he wanted control over his own activities.
Part B – Does the worker perform work that is outside the usual course of the hiring entity’s business?
This is the part that most current independent contractors will likely fail to meet because workers whose services are provided within the usual course of the hiring entity’s business will be considered an employee to whom the wage orders apply.
Some examples provided by the Court to help in the analysis:
- When a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee.
- Alternatively, 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 it would be reasonable to view these workers as employees.
Part C – Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?
This part could be satisfied with evidence of the workers’ own business incorporation, licensure, advertisements, offering to provide services to the general public or other potential customers. Alternatively, a worker is not engaged in an independent established trade usually if the hiring company unilaterally designates the worker as an independent contractor.
Again, to be considered an independent contractor under the wage orders, the business must meet the test on all 3 parts.
- What should I do? Since the new ABC test as outlined in Dynamex is limited to determining whether a workers is subject to an applicable wage order, it is possible for someone to be considered an independent contractor under the current multi-factor independent contractor test for purposes of worker’s compensation, or other statutes, while being considered an employee under the wage orders. Businesses that currently hire independent contractors would be wise to 1) review the wage order applicable to your business; 2) analyze whether each independent contractor meets the ABC test; and 3) if they do not, ensure that your businesses is meeting the wage and hour obligations outlined in the wage order.
Businesses that misclassify employees faces significant fines and the potential exposure of backpay and other penalties that quickly add up and multiply with each independent contractor you may have. If you hire independent contractors it would be prudent to seek the assistance of your employment attorney.
Schedule a call if you have questions or need assistance evaluating an independent contractor relationship.
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