California: Employers Face New Hurdles with Independent Contractor Classifications

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April 30, 2018

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In Dynamex Operations West, Inc. v. Superior Court (Lee), the California Supreme Court created a new test for determining whether a worker is an employee or independent contractor for purposes of wage and hour claims, making it one of the strictest standards in the country. A class action was filed against a delivery service employer who converted its employee drivers to independent contractors in 2004 for economic reasons. The class alleged, in part, that they were misclassified and Dynamex failed to pay overtime, provide itemized wage statements, and reimburse business expenses.

In defining what constitutes an “independent contractor,” the court looked to the wage order’s definition of “employ,” which means, in part, to “suffer or permit to work.” The court stated that the “suffer or permit to work” definition refers to “all workers who would ordinarily be viewed as working in the hiring business.” When looking to determine whether a worker is properly considered an independent contractor under a wage order, the court set a new “ABC” test which presumes a worker to be an employee unless the hiring business proves: (A) the worker is free from control and direction of the hirer in connection with the performance of the work, based in contract and in fact; (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (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.

Part A

Part A asks whether, as a matter of contractual right or actual practice, the type and degree of control exercised over a worker is what a business typically exercises over employees. A business need not control the exact manner or details of the work in order to have the necessary control an employer ordinarily possesses over its employees.

Part B

Part B asks whether the work performed is different from the hiring entity’s business. Working in the hiring entity’s business means providing services to the business in a role comparable to that of an employee. The court gave the examples of a retailer hiring a plumber or electrician to perform maintenance in a store (independent contractors), versus a clothing manufacturer that hires a seamstress who works from home or a bakery that hires a cake decorator (employees).

Part C

Part C looks at whether the worker is engaged in the business of the services provided to the hiring entity. An individual worker who is an independent contractor has “independently … made the decision to go into business for himself or herself.” The court noted an individual usually takes steps to promote the independent business, e.g., through incorporation, licensure, advertisements, routine offerings to provide independent business services to the public, etc. If a worker is “simply designated as an independent contractor by the unilateral action of a hiring entity,” they are likely to be deemed an employee. Moreover, finding that a worker is an independent contractor cannot be accomplished simply because the worker has a right to engage in an independently established business, is not prevented from having an independent business, or is permitted by contract to do so.

If a business fails to establish any element of the ABC test, the worker is an employee.

In its discussion, the court rejected the previous Borello multi-factor test for employee misclassification wage and hour claims, because the wage orders themselves define what it means to employ a worker. However, the Borello test may still apply in other scenarios not related to wage and hour claims, such as failure to reimburse business expenses. In rejecting the argument to use just one test, the court acknowledged that employers must be aware of a variety of standards and tests that may apply to independent contractors.

In light of this new ruling, companies must take extreme care when classifying employees as independent contractors and should review existing designations immediately.

Action Items

  1. Have existing independent contractor classifications reviewed immediately by legal counsel.
  2. Have independent contractor designation processes revised consistent with this new standard.
  3. Subscribers can call our HR On-Call Hotline at (888) 378-2456 for further assistance.

Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser.

© 2018 ManagEase

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