In one of the most impactful and far-reaching employment law decisions, the California Supreme Court recently handed down a landmark decision holding that, to comply with California wage orders, a business firm desiring to claim that workers are independent contractors rather than employees now must now carry the burden of proof to meet a new, rigorous three-part test. Although this decision was announced nearly a year ago, California employers continue to grapple with its implications. The new test is a radical change from the multi-factor test that applied in California since 1989. See Dynamex Operations West, Inc., v. Superior Court, S222732 (Cal. Apr. 30, 2018). The case presumes that all worker are employees. The decision has significant ramifications for California businesses.
THE NEW THREE-PART TEST
The California Industrial Welfare Commission (IWC) issues wage orders that establish minimum wages and other working conditions (meals, rest periods, temperature requirements, and other matters that govern California employers). But these wage orders apply to employees, not independent contractors. Accordingly, the definition of to “employ” someone is the lynchpin in classifying a worker. Under these wage orders, “to employ” means “to engage, suffer or permit to work.”
In its recent Dynamex decision, the California Supreme Court held: “In determining whether, under the suffer or permit to work definition, a worker is properly considered the type of independent contractor to whom the wage order does not apply, it is appropriate to look to a standard, commonly referred to as the ’ABC’ test, that is utilized in other jurisdictions in a variety of contexts to distinguish employees from independent contractors.”
Under the ABC test, the business carries the burden to prove that the worker satisfies all three of the factors in order to demonstrate that a worker or workers are ”independent contractors,” not “employees”:
- A. that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the 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.
A business’ failure to prove any one test will result in the worker being classified as an employee under the applicable wage order. By shifting the burden to businesses, the Court created a presumption that workers are employees. Failure to prove any one of these three parts of the test results in classifying the worker as an “employee” under the California wage order rather than an independent contractor.
PREVIOUS, FAMILIAR TEST REJECTED
The state Supreme Court set aside the long-standing test for evaluating whether a worker is an independent contractor or employee under the wage orders. It is a test that had been the universally accepted test in California since 1989, known as the “Borello test.” Under the prior Borello test, the standard used a multi-factor test for determining whether a worker was an independent contractor. The main factor was whether the firm or person who engaged the worker had the right to control the manner and means of accomplishing the work. In addition, the traditional Borello test examined nine other factors, which were not to be regarded as separate tests but rather inter-related tests, the weight of any one factor to depend upon the circumstances.
Henceforth, the ABC test now replaces the Borello test for judging whether a worker qualifies as an independent contractor under the California wage orders.
IMPLICATIONS: California Business Should Re-Examine Independent Contractor Status
The circumstances under which a California business may classify workers as “independent contractors” rather than “employees” have been vastly narrowed by Dynamex. All California businesses who treat a workers as independent contractors should immediately reassess their classification in light of the new ABC test of Dynamex. Employers should pay particular attention to the “B” part of the test which will be the most difficult to prove if the worker is engaged in providing the services provided in the usual course of business. For example, a yoga studio provides instruction in yoga classes. It will have a difficult time arguing that its yoga instructor was really an independent contractor. The studio exists to provide yoga instruction. On the other hand, if the yoga studio owners hire someone to do their taxes, tax preparation services fall outside the course of the yoga business’ offerings to the public and so would likely be able to pass the “B” test.
NORTH, NASH & ABENDROTH LLP: The attorneys at North, Nash & Abendroth LLP are experienced counsel in labor and employment matters and would be pleased to assist in evaluating compliance with the new ABC test. Please contact us at (949) 752-2200.