California Supreme Court Announces Rigid Test for Independent Contractor Classification

In a far-reaching decision, the California Supreme Court rejected the long-standing test for determining whether a worker is properly classified as an independent contractor for purposes of California’s wage orders, in favor of the more rigid and employee-friendly “ABC” test. Dynamex Operations West, Inc. v. Superior Court of Los Angeles. This ruling will have significant implications for businesses in California, particularly those that rely upon independent contractors in their day-to-day operations.

Under the ABC test, which will now apply with respect to enforcement of California’s wage orders,¹ a worker is presumed to be an employee and will only be considered an independent contractor if the hiring entity can establish each of the following:

• 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 such work and in fact;
• That the worker performs work that is outside the usual course of the hiring entity’s business; and
• 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.²

Dynamex involved a group of drivers that were classified as independent contractors by Dynamex, an on-demand shipping and delivery company. The drivers brought a class action claiming that Dynamex had been misclassifying them as independent contractors, when they were actually employees entitled to overtime, minimum wage, and other rights under the applicable California wage order and the California Labor Code. The trial court certified the class; in reviewing and upholding that decision, the California Supreme Court took the opportunity to clarify and hold that the ABC test applied to the determination of independent contractor status under California’s wage orders.

In adopting the ABC test, the court rejected the long-standing common law multi-factor test (the “Borello test”) that had been in place since its 1989 decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations. Under this decades-old framework, the primary consideration in determining if an employment relationship existed was whether the company had the right to control the manner and means by which the worker performed the work. The analysis also considered various secondary factors, including the degree of skill required to perform the work, the method of payment, and the nature of the company’s regular business. In this way, the Borello test was more akin to the common law “economic realities” test utilized by federal courts in interpreting the Fair Labor Standards Act, in which the focus is on the degree of control exercised by or reserved for the hiring entity as part of a larger balancing test in which no single factor controls.

Taking their cue from these tests, employers in California that utilize independent contractors to carry out functions that are within the employers’ core business—including, famously, employers in the “gig economy”—have attempted to shelter themselves from misclassification liability by undertaking various methods to grant their contractors control over the manner and means in which they carried out their duties (e.g., having them use their own equipment, not requiring them to wear uniforms). In light of Dynamex, however, such compliance methods will be inadequate to avoid wage and hour liability in California.

Indeed, companies that base their business model on use of independent contractors, including businesses in the gig economy, are likely to suffer the most from this decision, as that business model would appear to clearly fail to, at a minimum, satisfy part B of the ABC test. Commentators have already warned that this decision is a “seismic shift” for workers in the gig economy and that the decision will give those workers a huge edge in their fight to be classified as employees.

But the impact of Dynamex is by no means limited to the gig economy. Many employers use at least some contractors to carry out functions that can be properly considered within the entity’s usual course of business, and few employers focus on whether their contractors are otherwise customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

All businesses with operations in California will thus need to audit their current use of independent contractors. Businesses should not only review independent contractor agreements; they should also examine the nature of the tasks and duties the contractors perform with a renewed focus not only on the level of control exercised over those workers, but, critically, on how the nature of that work compares with the entity’s usual business. Finally, companies should analyze whether the contractors actually have their own independent business. If the contractor only acquired a business license or only incorporated to work for the company—or does not have other customers besides the hiring entity—then that worker may very well be considered an employee for purposes of California’s wage orders.