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 test is similar to Massachusetts independent contractor law, which is considered the strictest in the country.
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:
A. 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.
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 (in other words, that the worker is in business for themselves).
The prong that changes the most is the B prong. Prior to this decision, a hiring entity could show that a worker is an independent contractor by either showing 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.
While this shouldn’t interfere with your business if you hire a contractor to come in and work on building repairs or hire an independent contractor not in your same industry, 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 or issues not concerning wage orders such as Workers’ Compensation or health insurance, 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 by a worker is the most important of several factors to be considered when evaluating a classification analysis. Other factors include:
• Ownership of or providing of equipment and/or tools
• Opportunity for profit and loss, and
• Exclusivity or length of time for which services are performed
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
In light of this new decision, it may be more difficult proving that someone you hire as a non-employee is actually an independent contractor under the state’s wage and hour laws.
Any business that uses independent contractors as a regular course of business will have to address difficult questions concerning the continued viability of the contractor model.
Also, because the court homed in on the application of the “suffer or permit to work” standard to a variety of business relationships in California, hiring entities will have to make sure that the contracts they enter into reflect the parties’ allocation of responsibility for wage and hour violations.
Please contact your CoreMark agent or service team to access resources to help guide you through this ruling.