What Independent-Contractor Tests Apply in California?

There’s a new standard for wage orders, but different tests are used for other claims

Lisa Nagele-Piazza, J.D., SHRM-SCP By Lisa Nagele-Piazza, J.D., SHRM-SCP September 27, 2018
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Federal law doesn't pre-empt a California test that is used to determine whether workers are employees or independent contractors under state law, the 9th U.S. Circuit Court of Appeals recently ruled in California Trucking Association v. Su. Thus, the California labor commissioner could apply a state-law standard to truck drivers who claimed that they were misclassified as independent contractors.

The labor commissioner used an older test to evaluate the potential employment relationship, rather than California's new ABC test, but the court said that was allowed. Different tests may be used depending on the nature of a claim.

The Trucking Case

Members of the California Trucking Association are motor-carrier companies that transport items throughout the state and engage in interstate commerce. To haul freight, members use either company drivers (who are classified as employees) or owner-operators (who are classified as independent contractors).

Owner-operators use their own trucks, pay their own expenses and have control over how to perform the job. Nevertheless, they claimed that they were misclassified as independent contractors and were improperly denied benefits that are afforded to employees under state law.

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

The labor commissioner analyzed the case under the standard developed in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (Cal. 1989), which primarily looks at who controls the work. The test also evaluates multiple secondary factors, such as whether workers supply their own tools, how long services are performed and whether the hiring business supervises the work. The factors are evaluated in their entirety with no one factor being determinative.

The trucking association argued that the Borello test was pre-empted by the Federal Aviation Administration Authorization Act, which regulates motor carriage and expressly pre-empts some state regulations related to "rates, routes or services." But the 9th Circuit said that the Borello test is a labor standard that generally applies across industries in an area of law that is typically governed by the states and that the drivers' claim is not really related to motor-carrier prices, routes or services.  

Thus, the court found that the labor commissioner could review the drivers' claim under the Borello standard.

Multiple Tests

Employers may be confused by the ruling because it doesn't involve the stringent new ABC test that the state high court adopted this year in Dynamex Operations West v. Superior Court. Rather, the labor commissioner used the Borello test, which has been replaced in some circumstances.

The 9th Circuit noted that the ABC test doesn't apply to all claims. "Dynamex did not purport to replace the Borello standard in every instance where a worker must be classified as either an independent contractor or an employee for purposes of enforcing California's labor protections," the court said.

The state high court adopted the new ABC test for the limited purpose of interpreting California's wage-order rules, explained Stacey Chiu, an attorney with Kaufman Dolowich & Voluck in San Francisco. This includes claims for missed meal and rest breaks and unpaid overtime wages. 

The Borello test still can apply for other purposes, such as workers' compensation claims, tort claims for wrongful termination in violation of public policy and California Labor Code violations.

In the future, however, California employers can expect to be confronted with the Dynamex test far more often than the Borello test, said Jason Barsanti, an attorney with Cozen O'Connor in San Diego. The drivers in the trucking case didn't invoke the wage orders, he noted, but it is likely that, going forward, plaintiffs' attorneys will assert wage-order violations for which the more stringent ABC test will be applied.

The New ABC Test

In Dynamex, delivery drivers asserted classwide claims that they were misclassified as independent contractors and, as a result, the company violated provisions of the California Industrial Welfare Commission's wage order No. 9, which governs the transportation industry.

In that case, the California Supreme Court adopted a three-factor test to determine whether workers are employees or independent contractors under the state's wage orders. Under the new 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 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.

Employers should be aware that individuals, including those compensated as independent contractors, are presumed to be employees of the hiring entity under California's wage orders, Chiu said. The burden is now on employers to show that all three of the ABC test conditions can be met. "This is a high burden," she noted.

However, other federal and state law tests are still applicable outside the context of California's wage orders. For example, different tests are used to determine employment status under the Employee Retirement Income Security Act and the Internal Revenue Code.

"The main takeaway is that worker classification is not black and white," Chiu said. 

The bottom line for businesses that have workers perform services for the company's benefit in California is that they need to carefully evaluate the relationship if it's not a standard employer-employee arrangement, Barsanti said. The potential penalties for failing to properly classify a worker can be very costly, he added. "This is another case in California where an ounce of prevention is worth a pound of cure, and it makes sense to seek counsel to review independent-contractor-related policies and practices." 

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