California High Court Upends Independent Contractor Test

THE CALIFORNIA Supreme Court has handed down a decision that rewrites the state’s independent contractor law by adopting a more stringent test for determining whether or not someone is an employee for wage order cases.

The new law will affect any California business that uses independent contractors and it makes it more difficult to classify someone as an independent contractor.

In its decision in Dynamex Operations West, Inc. vs. Superior Court, the court rejected a test that’s been used for more than a decade in favor of a more rigid three-factor approach, often called the “ABC” test.

The ‘ABC’ test

Under this new test, a person would be considered an independent contractor only if the hiring entity can prove:

1. That 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.
2. That the worker performs work that is outside the usual course of the hiring entity’s business; AND
3. That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed (in other words, that the worker is in business for themselves).

The big change

The prong that changes the most is the B prong under the ruling (see box on right). Prior to this decision, a hiring entity could show that a worker is an independent contractor by either demonstrating that they work outside the course of the company’s usual business or outside all of the places of business of the hiring company.

The decision essentially deletes the second clause about outside all of the places of business of the hiring company.

In other words, the only way to be an independent contractor is if the work falls outside the scope of the usual course of business of the hiring entity. So, if you have employees doing the same work as an independent contractor, there could be a problem.

While this shouldn’t interfere with your business if you hire a contractor to come in and work on building repairs, companies that have been using the independent contractor model to conduct their business may run into problems.

It should be noted that this case only concerns wage orders issued by the Industrial Welfare Commission, and does not apply to other wage and hour laws.

That means for other cases not concerning wage orders, an earlier decision known as the “Borello” decision still stands in terms of the independent contractor test.

In Borello, the Supreme Court held that the “right to control” the means and manner in which work is performed is the most key factor when evaluating a classification analysis. Other factors include:

• Ownership of equipment
• Opportunity for profit and loss, and
• The belief of the parties.

This test is more flexible because it balances the different factors to arrive at a classification based on individual circumstances of each case.

Prior to Dynamex, many referred to the multi-factor Borello test as the traditional “common law” classification analysis.

The takeaway

The court has abandoned the existing test for deciding a worker’s employee status, which included factors like whether a person could be fired without cause and amount of supervision.

Now, workers are considered employees if their job is considered to be the “usual course” of the business operations.