On April 30, 2018, the California Supreme Court announced an extremely narrow, pro-employee test for determining whether a worker is properly classified as an independent contractor. The new standard, set forth in Dynamex Operations West, Inc. v. Superior Court, is so stringent that workers rights’ advocates are predicting a sweeping re-classification of workers throughout the state. Although the decision’s impact will fall most heavily on the gig economy, every California business that relies, in whole or part, on independent contractors rather than employees, should carefully audit their employee and contractor’s current classifications and make any necessary changes as soon as possible.
The Court’s decision abandons the multi-factor standard established in1989 in favor of a simple, three-prong test, termed the “ABC test.” To be properly classified as an independent contractor, all three of the following factors must be met:
(1) The worker must be free, in everyday tasks, from the hirer’s control and direction;
(2) The work performed must be outside the usual course of the hiring entity’s business; and
(3) The worker must be customarily engaged in an independent occupation or business of the same type as the work he or she is performing for the hiring entity.
The first “ABC” factor resembles the “right to control” standard used for years, just simpler and more streamlined. The second factor, however, requiring the work provided be outside the usual course of hirer’s business strikes a huge blow to business models based on leveraging the services of independent contractors as a revenue stream, such as Uber, DoorDash, GrubHub, and FedEx. Though these “gig economy” businesses have had some legal success arguing they don’t exert sufficient control over drivers to be considered employers, it would be hard to assert that drivers are performing a task that isn’t a standard feature of their business.
The third, “ABC” factor requires that the worker truly operate his or her own business offering the same type of work performed for the hiring entity. To qualify, the worker should actively serve other clients, and have all the trappings of an independent business (business license, advertising, capital investment, insurance, economic risk, and possibly employees of their own).
This decision should prompt California employers of all sizes and across all industries to re-think their contractor relationships. Employers should seek the assistance of counsel to ensure that all contractor classifications are appropriate, and to ensure than any internal audit is protected by attorney-client privilege.
—Aura Adams and Stefanie Renaud