Yesterday, the California Supreme Court announced an extremely narrow, anti-business 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. Though the decision’s impact will most immediately be felt within the gig economy, every California business that relies, in whole or part, on classifying workers as independent contractors rather than employees, should re-visit its approach.
The decision abandons the previous multi-factor standard that has been in place since 1989 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 “must have” factor resembles the “right to control” standard we have used for years, just simpler and more streamlined. Nothing new there.
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, “must have,” 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 will surely prompt businesses throughout California, and across all industries, to re-think their contractor relationships. Stay tuned for more information as we monitor how this decision materially changes how work gets done in the Golden State.
For more information, please contact Aura Adams at 707.241.9760 or aadams@HKemploymentlaw.com