The California Supreme Court Upends Independent Contractors

The California Supreme Court recently issued a landmark decision that will have consequences to any employer in California who utilizes independent contractors.  In Dynamex Operations West, Inc. v. Superior Court of Los Angeles, the California Supreme Court adopted a standard that will upend the existing independent contractor labor market. In particular, the Court embraced a standard presuming that all workers are employees rather than contractors, and placed the burden of establishing proper classification on any entity classifying an individual as an independent contractor.

The framework of this decision was made by broadly characterizing the misclassification of independent contractors as harmful and unfair to workers, honest competitors, and the public as a whole. The Court essentially analyzed and rejected the current standard and imposed a new “ABC test” for employers.

Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the putative employer proves that the worker:

(A) 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) performs work that is outside the usual course of the hiring entity’s business; and

(C) is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Note that each of these requirements needs to be met in order for the presumption that a worker is an employee to be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor.

This drastically alters the previous independent contractor standard. Whether an individual worker should be classified as an employee or independent contractor has considerable significance for employers, and the public generally. If a worker is classified as an employee, the employer bears the responsibility of paying Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, while of course, complying with the labyrinth of state and federal statutes governing the wages, hours, and working conditions of employees.

This decision not only expands the definition of "employee" under the California Wage Orders, it also imposes an affirmative burden on companies to prove that independent contractors are being properly classified. Indeed, many employers in California today rely heavily on the use of independent contractors. In light of this case, any businesses operating in California that treat workers as independent contractors should reexamine the relationship under the ABC test and determine whether any such workers should be reclassified.

The Court’s ruling is impactful and California employers should take notice. Employers should proactively reclassify workers to avoid future penalties; as employees who feel they are entitled to compensation for overtime and business expenses will be motivated to file lawsuits.