California Supreme Court Redefines Independent Contractor Analysis
On April 30, 2018, the California Supreme Court issued its ruling in Dynamex Operations West, Inc. v. Superior Court, completely overhauling (but not overruling) the independent contractor standard previously set forth in the seminal case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341. All businesses using independent contractors in California should review these relationships to make sure they comply with the new standard.
The Dynamex Operations West, Inc. v. Superior Court case arises out of a class action lawsuit filed in April 2005 by a plaintiff who worked for the company for a total of 15 days. The class action complaint alleged that Dynamex misclassified its drivers as independent contractors. Dynamex is a nationwide package and document delivery company.
In its holding, the Supreme Court stated that determining whether a worker is properly classified as an independent contractor under California’s wage orders requires a hiring entity to establish all of the following:
- A) The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
- B) The worker performs work that is outside the usual course of the hiring entity’s business; and
- C) 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.
This new “ABC test” is a departure from the standard set in Borello. The balancing test of Borello was tossed aside in favor of the more rigid ABC test identified above for disputes under the wage orders.
Part A requires looking at the degree of control the company has over the individual. If the individual is subject to the same type of control a business typically exercises over employees, then the individual is not an independent contractor. Examples of this would be setting the person’s schedule, controlling the way in which the person performs the work, and dictating the location where the work is performed. Prior to Dynamex, this was the principal factor considered. Now, it is on equal footing with parts B and C of the ABC test.
Part B requires the individual to perform a type of work that is outside of the company’s ordinary business, i.e., is the individual performing a service for the company, or would the individual be viewed by others as an employee of the company. The Dynamex case uses the example of a retail store that uses the services of a plumber – the plumber is an independent contractor – versus a clothing manufacturer that uses a work-at-home seamstress, or a bakery that uses cake decorators, both would be an employee under the ABC test.
Finally, part C requires proving that the individual is engaged in its own independently established business, rather than being a person assigned independent contractor status by the company. The Dynamex decision offered that individuals meeting part C’s requirement generally take steps to market their own business and obtain a business license, and they often perform their service for numerous other entities.
Do not be misled by the court’s “limitation” of the ABC test to disputes regarding wage orders. The IWC wage orders provide regulations regarding minimum wages, maximum hours, and other basic working conditions which are commonly implicated in wage and hour and misclassification disputes. For this reason, all businesses using independent contractors in California must reconsider any individual treated as an independent contractor to be sure the answer to all three parts of this new test is “yes” because, while limited to wage orders, those orders provide expansive regulations on employee working conditions.