May 2018

California Case of the Month: California Supreme Court Creates New Employees vs. Independent Contractor Test

By Patrick Klingborg

Lincoln, Gustafson & Cercos, LLP
 

By Phillip Simpler

Paul, Plevin, Sullivan & Connaughton LLP

On April 30, 2018, the California Supreme Court issued a much-anticipated decision in Dynamex Operations West, Inc. v. Superior Court (Case No. S222732).  The decision represents a substantial change to a fundamental California employment law standard: the test for whether a worker is classified as an employee or an independent contractor.

Many employers – and especially those in the gig economy – immediately face increased exposure for misclassification because the Dynamex decision establishes more stringent requirements for employers to properly classify workers as independent contractors.  Misclassifying a worker exposes the employer to significant liability for unpaid wages, taxes and a myriad of penalties for violations of the Labor Code.

Historically, the multi-factor analysis focused on the amount of “control” the employer could exert over a worker’s performance. The new test, termed the “ABC Test,” is meant to clarify the formerly murky standard by requiring the hiring entity to conclusively establish the following elements in order for a worker to be properly classified as an independent contractor:

(A) that 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) 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 of the same nature as the work performed for the hiring entity.

Without question, the Court intended for this decision to significantly broaden the definition of “employee” in California. However, the Court restricted the applicability of the test to enforcement of obligations found in California wage orders, such as restrictions concerning minimum wage, maximum hours, overtime, and meal/rest breaks. In other words, the common-law test should remain in effect at least for the time being in areas such as unemployment, workers’ compensation and discrimination. 

The impact of the Dynamex decision is impossible to overstate.  Given the questions the Court left unanswered by this decision, it will likely be left to the lower courts (or legislature) to provide clarity for practitioners and employers.  Most pressing is whether or not Dynamex applies retroactively.  Unfortunately, the decision did not provide clarity on that important issue.  Many commentators believe that Dynamex constitutes an interpretation of existing law, and as a result, applies retroactively.  This would place all California employers that complied with the prior test in peril.  Moreover, lower courts will have little guidance in actually applying the ABC Test, considering the Court provided only the outside plumber or electrician as examples of those properly classified as independent contractors.  Such workers would qualify as contractors under any standard.  This ambiguity will almost certainly lead to heavy litigation and inconsistent appellate decisions.

It is not uncommon for businesses to toe the line in classifying workers as independent contractors, whether to save money or attract workers interested in the freedom that accompanies contractor status. With its decision in Dynamex, the Court just moved the line. Businesses who classified workers as independent contractors may be immediately exposed to liability. Practitioners would be well advised to reach out to their clients to discuss this significant development.