California’s New Contractor Test Will Impact the Gig Economy

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As California employers grapple with the state high court's new misclassification test, they will need to review their current business relationships to ensure everyone is properly classified as either an employee or an independent contractor. Employers in the gig economy need to be particularly careful—as the new test could challenge their business models, which often rely heavily on contractors' work.

In Dynamex Operations West v. Superior Court, the California Supreme Court adopted a three-factor test to determine whether workers are employees or independent contractors under the state's wage orders. The prior test was a multifactor analysis that primarily focused on who exerted control over the work.

The new test is much narrower, said Lisa Pooley, an attorney with Hanson Bridgett in San Francisco. "At a minimum, it will require employers to take a hard look at how they classify their workers."

The ruling will have a significant impact given the proliferation of the gig economy in California, said Jim Evans, an attorney with Alston & Bird in Los Angeles.

Employees are generally entitled to certain benefits under California law—such as minimum wages, overtime pay, and meal and rest breaks—whereas independent contractors are not. The new test may make it easier for independent contractors to claim that they have been misclassified and are entitled to such benefits. 

Michael Studenka, an attorney with Newmeyer & Dillion in Newport Beach, said employers that have been following the independent-contractor debate shouldn't be surprised by the ruling: "The employee versus independent contractor classification issue has been a hot topic for a long time, and at the end of the day, the court memorialized a standard."

The gig economy has grown exponentially, and the law always has to catch up with technology, Studenka said. This ruling does that by establishing a test that examines how integral the job is to the business.

The ABC Test

The plaintiffs in the case were delivery drivers for Dynamex, which is a nationwide package and document delivery company. The drivers asserted classwide claims that they were misclassified as independent contractors and, as a result, that Dynamex violated provisions of the California Industrial Welfare Commission wage order No. 9, which governs the transportation industry.

[SHRM members-only resource: California Labor and Employment Law Overview]

"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," wrote Chief Justice Tani Cantil-Sakauye for the court. 

Under the new California analysis, all three of the following factors must be met for a worker to be properly classified as an independent contractor:

  • 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.
  • The worker performs tasks that are outside of the usual course of the hiring entity's business.
  • 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.

Prong A has always been a test. Businesses generally understand that their level of control over the work that is being performed will be scrutinized, said Todd Scherwin, an attorney with Fisher Phillips in Los Angeles. He added that Prong B is the significant change that employers need to understand.

It used to be that if a worker was doing something germane to the business, it would be difficult to show that that worker was an independent contractor, but the business could still argue that other weighted factors leaned toward an independent-contractor relationship. It will be much more difficult for hiring entities to show as an absolute factor for every independent contractor that the work performed is outside of the usual course of the business, Scherwin noted.

For example, if a CPA firm hires a plumber to fix a sink, the plumber is going to be an independent contractor. The firm doesn't care what tools the plumber uses, it trusts the worker to get the job done, and it is not in the business of plumbing. However, a plumbing company would likely have a problem hiring a plumber as an independent contractor—even if the worker used his or her own tools and worked for other businesses.

Pooley noted that the state high court's ruling applies to California wage orders that regulate wages, hours and working conditions. "One question is whether the new test will be applied beyond these wage orders," she said.

It's possible that several tests could be used for one case, depending on what statutes and regulations were allegedly violated. 

What Now?

"Employers in California should expect much tougher standards in litigation asserting misclassification of independent contractors," Evans said.

The ruling could force companies to re-evaluate their use of independent contractors, he added. "Class-action litigation challenging independent-contractor classifications has become fairly common, especially for companies in the sharing economy."

Any company that is just getting started, is growing or regularly works with independent contractors should consult with an expert to make sure it's classifying workers correctly, Studenka noted.

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