Independent Contractor or Employee?:  The California Supreme Court’s New ABC Test

Independent Contractor or Employee?:  The California Supreme Court’s New ABC Test

Employers & Workers To Be Affected Amid Shifting Landscape

The California Supreme Court issued a new test to distinguish between employees and independent contractors that will likely have far reaching consequences for business owners and independent contractors across California. 

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The decision by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex), (2018) 4 Cal. 5th 903, may turn out to be one of the most important employment decisions in the state of California in decades.  One sector that will likely face big changes is California’s “gig” economy which includes major players like Uber and Lyft, not to mention hundreds of other similar employers who will be forced to reexamine their relationship with their workers and dependence on independent contractors.  The consequences are possibly far reaching and will likely affect changes in how these large companies, as well as small businesses, classify their workers.

The main thrust of the new ABC test is that all workers are presumed to be employees unless all three of the following ABC conditions are met

  1. The worker is free from the control and direction of the hirer in connection with performing the work, both under the terms of the contract and in fact;

  2. The worker performs work outside of 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

Failure to meet even one element of this ABC test would result in classification of the worker as an employee.  

Some California employment attorneys have predicted that Dynamex will necessitate that thousands of independent contractors around California be re-classified as employees.  And with more workers classified as employees rather than independent contractors, businesses who rely on independent contractors will have to to protect themselves from the exposure from misclassification.  

Ultimately, it looks as if the implementation of the ABC Test across the world’s 6th largest economy will mean more responsibilities for California’s employers as a result of the need to reclassify many workers who had been appropriately classified as independent contractors.  With the ruling only coming this April 30, 2018, it remains to be seen how lower courts will apply the Dynamex decision and the ABC test.  Importantly, Dynamex did not address whether the decision can be applied retroactively which is an issue that the Supreme Court will likely address in the near future.  

However, even as the case law applying and interpreting the ABC test continues to develop, employers with independent contractors need to be aware of their workers’ status under the new test.  The consequences facing an employer who has misclassified its employees as independent contractors can be severe and far reaching.  Conversely, employees who have been misclassified are entitled to recover damages against their employer.   Even with the new guidance from Dynamex, the analysis of whether a worker has been properly classified as an independent contractor can be nuanced and fact-intensive.  Given the complexity of these issues and the financial consequences that can result from misclassification, it is advisable to consult with an experienced employment law attorney.