by Julie Ann Giammona

Yesterday, in a highly anticipated decision, the California Supreme Court overturned almost 30 years of case law defining who qualifies as an independent contractor.  Adopting a standard that will dramatically reduce the number of workers that can be classified as independent contractors, the Court announced that every worker will be presumed an employee, unless the hiring entity can show that the worker: (1) is free from daily control; (2) engages in work that is outside the ordinary course of the hiring entity; and (3) is actually operating his or her own business of the same nature as the work being performed for the hiring entity.

Dynamex Operations West, Inc. v. Superior Court (April 30, 2018), arose from a class-action lawsuit brought by delivery drivers that transported items for a courier service. The drivers argued that they shared a sufficient commonality of interest to be considered workers, and not independent contractors under the California Industrial Welfare Commission’s (IWC’s) definition of “employee,” thus certification was appropriate. The Court agreed.  In reaching this decision, the Court discarded the flexible standard set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989), which emphasized the degree and manner of control the employer exercised over the worker, and instead adopted IWC’s definition of employee: anyone who is engaged, suffered or permitted to work.  The Court concluded that this standard would best be satisfied by applying a strict three factor “ABC” test, all of which must be met to avoid classification as an employee.

Part A: Worker Must Be Free from Control

The first part of the ABC test applies the common law standard that has been applied for several decades in the Borello case noted above. The worker must be free to control the manner and means in which the work is performed, although the Court was quick to point out that an employer “need not control the precise manner or details of the work” as a prerequisite to a finding of employment status. Part “A” of the test is familiar to employers and does not present any new challenges.

Part B: Services Must Be Different Than Those of The Business

The second part of the ABC test requires that the services being provided are distinct and separate from those of the services being provided in the usual course of business of the entity. This part of the test greatly expands the number of persons who will be swept into the umbrella of “employee.”  For example, the Court noted that a retail store that hires a plumber for repair services would not be considered an employer of the retailer; whereas, a clothing manufacturing company who hires work-at-home seamstresses to make clothing would be considered an employer because the seamstresses are doing the same work in the usual course of business of the clothing manufacturer.

Part C: Worker Must Be Engaged in A Business of The Same Nature as Work Performed

The Court stated that the term “independent contractor” is usually understood to refer to someone who “independently has made the decision to go into business for himself or herself.”  A company cannot prove independent contractor status merely by arguing that it did not prevent the worker from engaging in an independent business. Instead, facts that would demonstrate a separate business exists, include, though not required, business licensing, incorporation, or advertising. Moreover, the services being provided by the worker in his or her own business, must be the same as those provided to the hiring entity.

What Employers Need to Do Now

In light of this stunning decision derailing long-held principles, employers need to immediately review the employment status of all workers. Misclassification of a person as an independent contractor instead of an employee exposes an employer to significant liability under California wage and hour law. Review of employment status is fact specific and will vary on a case by case basis. Ferber Law has the legal expertise and commitment to assist you in this process.

 DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.