Relearning the ABCs: California Supreme Court Adopts New Independent Contractor Test

Last week, in Dynamex Operations West, Inc. v. Superior Court, 2018 WL 1999120 (Apr. 30, 2018) (Dynamex), the California Supreme Court upended the prevailing understanding of the independent contractor-employee distinction under California law. In a ruling that is certain to have wide-ranging repercussions for companies that rely on independent contractors, the Court declined to apply the multi-factor common law test derived from its 1989 decision in S.G. Borello & Sons, Inc. v. Dep’t of Indus. Rel’ns, 48 Cal. 3d 341 (1989) (Borello) to the question of whether a worker is an “employee” subject to the minimum wage and overtime protections of the California Industrial Welfare Commission’s (“IWC”) wage orders. Instead, the Court adopted a simple, three-part test that likely will expand the wage orders’ reach.

For the nearly three decades preceding Dynamex, most lower California courts (and even the California Division of Labor Standards Enforcement) had relied on the Borello standard to determine whether or not a worker was an employee subject to the IWC wage orders, or an excluded independent contractor. The Borello standard is a holistic test, which consists of 12+ factors that can be applied in varying combinations depending on the circumstances to justify an independent contractor classification. The primary focus is on the degree of control exercised by the hiring entity over the manner and means of the workers’ performance, but the standard also focuses on such secondary factors as whether the worker purchases his or her own equipment, sets his or her own hours, contracts for discrete units of work rather than indefinite periods of time, hires his or her own helpers/employees, performs services for companies other than the hiring entity, and assumes risk for profit and loss. In practice, because it was so fact-intensive, the Dynamex Court found the Borello standard to be unwieldy to apply.

Perhaps in part because of this unwieldiness, the Dynamex Court confined the Borello standard to the context in which it originated (the coverage of the California workers’ compensation statute), and adopted a simplified “ABC test,” which it intended to give broader effect to the definition of a “covered employee” under the IWC wage orders. Under the new ABC test, for a worker to qualify as an independent contractor, a hiring business now bears the burden of proving each of the following three factors:

  1. That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under contract for the performance of the work and in fact; and
  2. That the worker performs work outside the usual course of the hiring entity’s business; and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.[1]

Similar to the right-of-control prong of the Borello standard, Part A of the ABC test focuses on whether the worker, in contract and in practice, exercises genuine autonomy over the performance of the contracted services. Part B focuses on whether the services rendered under contract are beyond the scope of the hiring entity’s usual course of business, which the Court clarified to mean whether the work performed is distinguishable from that which an employee of the company would be expected to perform. Finally, Part C focuses on whether the employee actually engages in an established business for him- or herself. In general, evidence pertinent to Part C may include, for example, whether the worker takes steps to promote his own trade or business to the community, including incorporation, licensure, advertising (e.g., making business cards), routine offerings to provide services of his or her business to potential customers, and so forth.

The adoption of the ABC test raises many new questions, and will no doubt spur the plaintiffs’ bar to challenge the business models of technology and other companies that frequently or regularly partner with independent contractors. In particular, future legal battles will likely include how to define the “usual course of the hiring entity’s business.” In light of these developments, companies that rely on independent contractors to render services to customers in the State of California should consider conducting a detailed review of their operations and independent contractor agreements, and seek legal counsel to verify compliance with the new ABC standard.

[1] Dynamex, slip op. at 66-67.

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