California Adopts New Test for Independent Contractors

On April 30, 2018, in a departure from well-established precedent, the California Supreme Court held that the proper standard for determining whether a worker is an independent contractor or an employee under the state Wage Orders is the “ABC” test.  Prior to this ruling, courts and the California Division of Labor Standards Enforcement had utilized the multi-factor balancing test established by the court in Borello & Sons, Inc. v. Dep’t of Indus. Relations for this determination.

This decision will make it much more difficult for employers to classify workers as independent contractors with potentially far reaching implications including subjecting them to liability for misclassification which could include back payment of federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, workers’ compensation premiums, and unpaid minimum wages and overtime wages and penalties associated with failure to pay proper wages.

The Old Rule (Borello)

Under the Borello test, a court looks at whether a person to whom service is rendered (the employer or principal) has the right to control the manner and means of accomplishing the results of the work.  Control is therefore the foundational element of this test.  The more control the principal exercises over the worker and the means by which work is performed, the more the test weighs in favor of finding the worker an employee.

In addition to the element of control, the Borello test provides for nine factors that a court may consider in determining whether an employment relationship exists, these are: (1) right to discharge at will, without cause; (2) whether the worker is engaged in a distinct occupation or business; (3) the kind of occupation (specialty or general work); (4) the skill required for the work; (5) whether the principal or worker supplies the tools for the work; (6) the length of time the worker will perform the services; (7) the method of payment (by time or by the job); (8) whether or not the work is part of the regular business of the principal; and (9) whether or not the parties believe they are forming an employer-employee relationship. In considering these factors, the court weighs them as a whole to determine whether the relationship is one of principal-independent contractor.

Thus, under the Borello test, a company might have a worker over whom it exerts fairly significant control, but based on the additional factors, the relationship weighs more towards a principal- independent contractor arrangement.

The New ABC Test

In Dynamex Operations West Inc., v. Superior Court, the court held that the ABC test is the proper standard for determining independent contractor status of a worker under the California Wage Orders. This test has been adopted in several other states and is known as a more employee-friendly standard because the burden is on the employer to prove that the worker is not an employee.

Under the ABC test, the worker is presumed to be an employee unless the hiring entity proves ALL three parts (A, B, and C) of the test:

  1. 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;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. 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.

Importantly, if the hiring entity fails to satisfy any one of the three parts of the test, the worker will be deemed an employee who is owed all rights and protections under the Wage Orders.

Control

In discussing the requisite control an entity must exert over a worker for that worker to be deemed an employee under part A of the test, the court made it clear that,  depending on the facts, minimal control may be sufficient.

As an example, the court cited a different case where work-at-home knitters and sewers were found to be employees even though they worked at home on their own machines at their own pace and on the days and times of their own choosing. Because the workers were subject to the company’s direction that the product be knit, not crocheted, and how it was to be knit, including the pattern to be knit, they were employees subject to the hiring entity’s control.

Conversely, a construction company was able to establish that a worker was an independent contractor by showing that the worker set his own schedule, worked without supervision, purchased all materials using his own business credit card, and declined an offer of employment from the employer because he wanted to control his own activities.

Work Outside of the Usual Business

In order to satisfy part B, the hiring entity must show that the worker was performing work that is not comparable to that of an employee of the business and not within the usual course of the business of the hiring entity.

The court gave the example of a retail store that hires an outside electrician.  The electrician is clearly an independent contractor because his services are not part of the store’s usual course of business and he would not reasonably be seen as working for the store.  However, if a bakery hires cake decorators to work on a regular basis on its custom-designed cakes or a clothing manufacturer hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company, those workers are more likely to be deemed employees since they are performing work in the usual course of business of the hiring entity and can reasonably be viewed as working for the hiring entity.

Independent Established Trade, Occupation, or Business

To satisfy part C of the test, the hiring entity must show that the worker has actually engaged in an independent trade, occupation, or business of the same nature as the work being performed and not simply that the worker could have such a business.  The fact that the company has not prohibited or prevented the worker from engaging in independent business is not sufficient to show the worker made the independent decision to go into business for himself or herself and has an established trade, occupation, or business.

A significant factor in the determination of whether a worker is truly independent is whether the worker receives income from any party other than the hiring entity. Another important factor is whether the worker has taken steps to establish and/or promote his or her independent business such as through incorporation, licensure, advertisements, routine offering to provide the services of the worker’s independent business to the public.

ABC Test vs Borello

One significant question that the court did not address is whether the Borello multi-factor test remains the appropriate test for claims brought outside the context of California’s Wage Orders, e.g., claims under the Labor Code such as for reimbursement for business expenses or waiting time penalties. Accordingly, California employers must be aware that a worker’s status as independent contractor may be tested under several different standards, one of which will likely be the ABC test.

Takeaways

Dynamex creates significant changes to California’s law when it comes to classification of independent contract workers. While the ABC test is clearly the more stringent standard for employers to meet, due to the potential for application of both Borello and the ABC test, employers should become familiar with both standards and should evaluate all independent contractor relationships against them. Employers who currently have workers classified as independent contractors should thoroughly reevaluate those worker’s classifications using the ABC test (and Borello is they did not previously do so).