California Supreme Court adopts ABC Test and makes it more difficult to classify workers as Independent Contractors

By: Kyle D. Kring

On April 30, 2018, the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, made it much more difficult for businesses to properly and legally classify workers as independent contractors as opposed to employees. In a significant and long-awaited ruling, contained in an 82-page opinion, California's highest court clarified the test to determine whether a worker is an employee or an independent contractor for purposes of claims under the California Industrial Wage Orders which regulate the wages, hours, and working conditions (such as required meal and rest breaks) of California workers. Industry experts have estimated that classifying workers as employees, instead of as independent contractors, can increase costs by 20-30 percent. The greatest impact of this new test will be on those companies that hire "independent" contractors to perform work that would generally be considered a core part of the company's business.

The Supreme Court adopted a simpler to apply, but more difficult to establish "ABC Test" to determine whether an individual is an employee or independent contractor. The ABC Test is currently used in Massachusetts and New Jersey. The Court essentially scrapped the existing test for determining employee status, which was used to assess the amount of control the employer had over the worker. That test looked at 10 factors that had varying degrees of importance.

Under the new "ABC Test", a worker will be properly considered as an independent contractor, to whom a wage order does not apply, only if the hiring party can prove all three of the following:

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

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.

The plaintiffs in Dynamex were two same-day pickup and delivery drivers who filed a lawsuit alleging that Dynamex misclassified their employees as independent contractors. The drivers alleged claims based on Dynamex's violation of the California Labor Code and Wage Order No. 9, which applies to the Transportation Industry. Interestingly, some of the drivers had previously been treated as employees and were converted to independent contractors in 2005.

The Plaintiff drivers moved for class certification which the trial court granted. When Dynamex appealed, the parties disagreed on what test governed the classification of independent contractors for purposes of California Wage Order violations. Dynamex argued that the common law and often-used Borello' multi-factor test should apply. Plaintiffs argued that the test for determining joint employer liability set forth in Martinez v. Combs (49 Cal. 4th 25 (2010)) should apply.

Prior to the Dynamex case, California courts and various state agencies routinely used the multifactor common law test set forth in S.G. Borello & Son's, Inc. v. Dept. of Industrial Relations 48 Cal.3d 341 (1989) to determine whether a worker was properly classified as an independent contractor. Borello concerned whether farmworkers hired by a grower to harvest cucumbers under a written "sharefarmer" agreement were independent contractors or employees for purposes of the California workers compensation statutes. The court in Borello concluded that the farmworkers were employees as a matter of law.

The new ABC Test adopted in Dynamex, only applies to claims asserted by misclassified independent contractors under the California Industrial Wage Orders. For all other claims, the prior common law test set forth in the Borello will apply.

The California Supreme Court's adoption of the more stringent ABC Test for properly classifying independent contractors for purposes of the California Wage Orders will have significant implications for those companies that regularly hire independent contractors in California. Businesses that currently utilize independent contractors to perform work that involves the usual and customary work done by the hiring business should seriously consider their potential liability and other options. Additionally, those business that do hire independent contractors should make certain that they are indemnified for any potential wage and hour and/or Wage Order claims.

Kyle D. Kring is a Partner of Kring & Chung, LLP. He can be reached at (949) 261-7700 or via email at kkring@kringandchung.com.

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