If your business uses independent contractors at all, you have probably heard about Dynamex Operations West, Inc. v. Superior Court and the new “ABC Test” to analyze whether a worker is an employee or an independent contractor. You were probably worried about whether your independent contractors pass the ABC Test. You are justified in worrying because the new test makes it much more difficult for someone to be classified as an independent contractor. This then opens the door for claims of misclassification, for missed meal break and rest break penalties, and unpaid overtime because that’s what you paid your hourly workers but not your independent contractors. Your business may be sitting on a 5 to 6-figure time bomb.
ABC Test Recap
If you have not heard about Dynamex or the ABC Test, or if you need a recap, here it is.
Under this new independent contractor test, a worker is properly considered an independent contractor to whom the applicable wage order does not apply if the hiring entity establishes all of the following:
(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.
The California Supreme Court notes that it is assumed that anyone providing services is an employee unless the hiring entity is able to establish all 3 parts of the new independent contractor test.
Read more about Dynamex and the ABC Test.
3 Things to Know About Dynamex and the ABC Test
The California Court of Appeal provides employers with further insight and clarification on the new ABC Test in an opinion called Garcia v. Border Transportation Group, LLC et al. Employers, and employment attorneys as well, will continue to have questions and learn how the courts will interpret each of the three parts of the ABC Test. Although Garcia does not answer all of the questions, it does address the third part of the ABC Test and makes other observations and clarifications of the Dynamex opinion. Below are the 3 key takeaways.
- Dynamex Applies to Wage Order Violations
In Garcia, the Court of Appeal confirmed that the ABC Test is the test to determine whether a worker is subject to a Wage Order’s requirements. Read about Wage Orders. However, the Court also clarified that the multi-factor Borello Test that focused on control and a list of secondary indicia is still the test for worker’s compensation and non-Wage Order claims such as wrongful termination in violation of public policy and waiting time penalties.
2. Dynamex Applies Retroactively
Many may be surprised to learn that the ABC Test will apply retroactively. What this means is that someone who worked as your independent contractor for your company 2 years ago (before the Dynamex decision came out and before you ever heard of the ABC Test), could seek wages and penalties today for the past misclassification. Similarly, the Labor Commissioner could audit your business and impose penalties for missed meal breaks and rest breaks and unpaid overtime due to people who may have been properly classified as independent contractors in the past but who don’t pass muster under the ABC Test.
3. Worker Must Currently Have an Independent Business
The Court in Garcia analyzed the last prong of the ABC Test – whether the worker “independently has made the decision to go into business for himself or herself.” The Court in Dynamex said that this factor can be proven with evidence that the worker has “take[n] the usual steps to establish and promote his or her independent business – for example, through incorporation, licensure, advertisement, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.” This means that the independent contractor is actively engaged in an independent business at the time they start working for your company. The fact that you do not prohibit or prevent the independent contractor from working for others and therefore could have engaged in his or her independent business is not enough to meet this prong of the ABC Test.
As usual, this is a fact-specific analysis. In Garcia, which asks whether a taxi driver is an independent contractor, the permit requirements and the realities of the business environment was such that at the time that plaintiff was driving for defendant, he could not and did not work for another taxi company. Thus, he was not properly classified as an independent contractor and was subject to the wage order applicable to taxi drivers. However, a taxi driver in a different city under a different circumstance, may be a proper independent contractor.
The penalties for wage and hour violations are steep and cumulative and could seriously jeopardize your business’s financial health. If you use independent contractors, understand the ABC Test and the wage order applicable to your industry so that you can ensure compliance. Ask the independent contractor for proof that he or she is in an independent business and keep a copy with the independent contractor agreement. These might include a business license; Statement of Information from the Secretary of State; advertisements for the business; or a list of clients.
If you are concerned about your exposure, contact us for a complimentary employment practices audit.