Recent Case Narrows the Definition of an Independent Contractor

Recent Case Narrows the Definition of an Independent Contractor

Published May 2018

A recent decision handed down by the California Supreme Court has yet again expanded the rights of employees by narrowing the class of individuals who qualify as independent contractors under California wage and hours law, and opened the door to a new wave of class actions. The decision, in Dynamex Operations West, Inc., delivered by the Court on April 30, 2018, has upended the decades-old multi-factor test previously set forth by the Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, focusing instead on a new test – the “ABC test” currently utilized in other jurisdictions.

Under the ABC test, the trier of fact presumes all workers qualify as employees. The impetus is then on the hiring entity to prove that the worker qualifies as an independent contractor. In order to make this showing, the hiring entity must show:

• The worker is free from the control and direction of the hirer in performance of the work, both under the contract and in fact;
• The worker performs work that is outside of the usual course of the hiring entity’s business; and
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed

The test is particularly restrictive in that the hiring entity must show all three elements to prove the worker is an independent contractor. In Borello, the (B) and (C) elements were just a part of the overall list of factors which went in favor of either classification, and not necessarily determinative.

The Dynamex decision also clarified that a hiring entity cannot satisfy the (B) element simply by showing that the worker performs work outside of the employer’s place of business, citing contemporary work practices, wherein many employees telecommute or work from their homes.

In addition to imparting the new “ABC test” the Dynamex Court made is easier to establish commonality and predominance, which are required for class action suits, by upholding the trial court’s decision to certify the complaining Dynamex delivery service drivers as a class. The Dynamex business model of classifying its delivery drivers as independent contractors resembles that of many other trucking companies and app-based service business. For example, at Dynamex, delivery workers worked on-demand suing their own vehicles, they set their own schedules, they remained free to accept or reject an assigned delivery, and they received pay based on a flat fee or a percentage of the delivery (not hourly). Such factors, under the previous Borello test, may have been enough to render them independent contractors.

The question of whether an individual worker should be properly classified as an employee or an independent contractor has considerable significance for both the individual worker and the business for which they work. If a worker is classified as an employee, the business bears the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing workers’ compensation insurance, and complying with numerous state and federal statutes and regulation governing the wages, hours and working conditions of employees. On the other hand, if a worker is properly classified as an independent contractor, the business does not bear any of those costs or responsibilities, and the worker is not afforded the protection of labor laws and regulations. Although at times it may be advantageous to both the worker and the business to classify a worker as an independent contractor, there is also risk in doing so.

If a worker is misclassified by its employer, the employee may seek to bring claims against that employer which can be substantial in nature, including wage and hour law violations, seeking unpaid vacation time, and waiting time penalties, among others.

Companies operating in California with independent contractors should seek counsel to reevaluate such classifications immediately and make any adjustments so that they are in compliance with the new ABC test set forth in Dynamex.

Contact the attorneys at Khashayar Law Group and LOKK Legal for more information.