The California Supreme Court issued a significant ruling this week adopting a new test for independent contractor status that will impact many businesses in the “gig economy,” such as Uber, Grub Hub and Lyft. The new rule will also affect many regular businesses that currently utilize independent contractors. The impact of this decision is not as far-reaching as some media reports have made it out to be, however. There is still a place for independent contractors in the California workplace, but companies must be extra cautious in classifying less skilled, non-professional workers as independent contractors, particularly if they perform tasks that are integral to the regular business of the company.
Dynamex Operations West v. Superior Court involved a class action wage and hour lawsuit by delivery drivers who had been classified as independent contractors. The issue before the Supreme Court was whether the drivers were “employed” under the broad definition in the wage orders, which set forth the minimum wage, overtime and meal and rest period requirements for non-exempt employees. The company argued that the traditional multi-factor test for independent contractor status used for purposes of determining tax status or workers compensation coverage should be applied to determine if the drivers were employees or independent contractors. The court disagreed, finding the traditional test was too narrow given the broad definitions in the wage orders.
The court decided to adopt a new test for independent contractor status that had previously been adopted by a few other states, known as the “ABC” test. In order to prove an individual is an independent contractor and not an employee covered by the wage orders, an employer must demonstrate all three of the factors below:
A.) The individual is free from the control and direction of the hiring entity in performing their work, both by contract and in fact;
B.) The work performed is outside the usual course of the hiring entity’s business;
C. ) The individual is independently engaged in a business, trade or occupation performing the same work as the work performed for the hiring entity.
While the ABC test has commonalities with the traditional test, the requirement that each factor must be met (as opposed to a totality of the circumstances approach) will make it much more difficult for businesses to establish independent contractor status. Many companies have successfully argued that individuals are not employees even when they performed work that is part of the usual course of business. Under the ABC test, however, such individuals are employees, even if they meet the other factors indicative of independent contractors. The Dynamex court ruled, as an example, that the delivery drivers were clearly performing work that was part of the usual course of the company’s business, which was to deliver packages, and therefore they could proceed with their class claims based on employee status.
Importantly, the Dynamex ruling only affects wage and hour claims under the wage orders. It remains to be seen whether the court will extend the ABC test to other independent contractor determinations, such as unemployment or workers compensation eligibility. Consequently, the immediate impact of Dynamex is a greater risk of liability for companies using independent contractors who undoubtedly would be non-exempt if they were classified as employees. If a professional (doctor, lawyer, engineer, etc.) is misclassified as an independent contractor under the ABC test, for example, there is no liability for overtime or meal and rest period penalties, because they would clearly be exempt employees not subject to the wage orders.
If your company uses independent contractors, particularly in performing jobs that are core to your business, you should immediately seek guidance from experienced employment counsel to determine if they should be classified as non-exempt employees under the test announced in Dynamex. If so, there are strategies that can be employed to minimize your company’s exposure to wage and hour liability.