The California Supreme Court adopted a new test Monday for determining whether workers are employees—rejecting the court’s previous multi-factor test. The decision in Dynamex Operations West Inc. v. The Superior Court of Los Angeles County, S222732 (Cal. Apr. 30, 2018), has immediate ramifications for employers in California who hire or utilize independent contractors. In short, the bar for establishing “independent contractor” status has been raised, and California companies will have to assess their practices in order to conform to this new reality.

The Dynamex court found that workers are presumed to be employees for the purpose of all California’s wage orders unless the hiring entity can establish otherwise under the so-called “ABC” test. Under this test, a worker may be classified as an independent contractor only if the hiring entity establishes that:

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 performance of such work and in fact

B.   The worker performs work that is outside the usual course of the hiring entity’s business

C.   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

If the hiring entity cannot establish all factors, the worker will be considered an employee. The ABC test will be familiar to some employers, as it is used in certain contexts in other jurisdictions, including in Illinois and New Jersey.

The ruling is a significant departure from the court’s prior test enunciated in its 1989 decision in S.G. Borello & Sons Inc. v. Department of Industrial Relations, which required a multi-factor analysis of whether an employment relationship exists, focusing on whether, under the “totality of circumstances,” the entity has a “right to control” the worker’s activities. The Dynamex court observed that the Borello test lacked sufficient clarity and was subject to manipulation, creating the potential for abuse in a gig economy that encourages the use of independent contractors.

California Employers Need to Learn Their ABCs

The decision creates challenges for companies that utilize workers deemed by the employer to be independent contractors – especially those workers who do not fit the “traditional” mold of a worker engaged in an independent business who, as part of that business, offers his or her services to the hiring business:

“[A]n individual worker who has been hired by a company can properly be viewed as the type of independent contractor to which the wage order was not intended to apply 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. Such an individual would have been realistically understood, instead, as working only in his or her own independent business.”

It remains to be seen how this and other aspects of the ABC test will be construed and applied, especially to companies operating in the “gig” economy. There is little doubt, however, that the Supreme Court’s decision is intended to reign in perceived abuses in the misclassification of workers as independent contractors rather than employees.

The new test applies only to California’s wage orders, which cover employers’ obligations relating to minimum wage, overtime, and other working conditions. The court’s ruling does not address other state laws, including workers’ compensation and unemployment, nor does it affect federal standards.