California Supreme Court Adopts New “ABC Test” for Classification of Independent Contractors: Potential Risk and Impact on Public Agencies

Category: Special Bulletins
Date: May 9, 2018 11:05 AM
California Supreme Court Adopts New “ABC Test” for Classification of Independent Contractors: Potential Risk and Impact on Public Agencies

This post was authored by Richard C. Bolanos.

On April 30, 2018, the California Supreme Court issued a decision in the case of Dynamex Operations West, Inc. v. Superior Court (S222732), in which it established a new and more streamlined legal test to determine whether a worker should be classified as an independent contractor or employee.  This test applies to California’s Industrial Welfare Commission (IWC) Wage Orders which regulates wages, hours, and working conditions.

The Court rejected the application of the longstanding and flexible multifactor standard in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341, which was used by California courts for years.

The new worker-friendly standard presumes all workers are employees and places the burden on an employer to establish that a worker satisfies the three independent conditions of the “ABC Test” for an independent contractor.

Factual Background and the “ABC Test”

Dynamex is a national same-day courier service that operates a number of business centers in California.  The company hires delivery drivers to transport letters and packages to its customers.  Initially, Dynamex classified its California drivers as employees, but then later converted all of its drivers from employees to independent contractors in an effort to save costs.  This lawsuit was subsequently filed by Dynamex drivers alleging that the company misclassified them because their job responsibilities as independent contractors were the same as when they were classified as employees.

Following an extensive analysis of California case law on the legal test for determining whether a worker is an employee or, instead, an independent contractor, the Supreme Court held that is was appropriate for employers to look to a standard commonly referred to as the “ABC test,” that is utilized in other jurisdictions.  Under that test a worker is properly considered an independent contractor to whom a wage order does not apply, only if the employer establishes:

  • 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.

Failure to establish all of the above three factors results in a determination that a worker is an employee and thus not an independent contractor.

How Is It Relevant to Public Agencies?

The Dynamex decision affirms the general legal rule that it is the employer’s responsibility to correctly classify a worker as an independent contractor.  Failure to meet the legal test will expose your agency to back pay and fines for failure to pay federal Social Security and payroll taxes, unemployment insurance, workers compensation benefits, and for violation of various federal and state statutes and regulations governing retirement, wages, hours, and working conditions.  And while the Dynamex ruling is limited to an analysis of the California Wage Orders (Cal. Code Regs. § 11010 et seq.), it provides clear guidance for applying the independent contractor test.  Public agencies are well advised to review all independent contractor arrangements under the "ABC test" and reclassify such arrangements if necessary.   LCW is available to assist your agency in conducting such a review.

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