News & Updates: Dynamex Operations: California Supreme Court Creates New Test for Independent Contractors

On April 30, 2018, the California Supreme Court issued an opinion regarding independent contractors with profound implications for California employers. The Court’s decision in Dynamex Operations West Inc. v. Superior Court rewrites the test for determining whether a worker is an “employee” or an “independent contractor” for purposes of California wage-and-hour claims.

The case involved drivers for a delivery company who had worked as employees before being reclassified by the company as “independent contractors.” The drivers filed a class action lawsuit claiming that they were improperly classified, and the California Supreme Court addressed the question of what test to apply for claims alleging violations of California’s Industrial Welfare Commission Wage Orders. The Court’s ruling changes the “control test” standard applied by the Labor Commissioner and courts for many years, and institutes a new test with huge impacts for California employers.

The new test (called the “ABC” test) states that an individual will be presumed to be an employee (rather than an independent contractor) under the law, unless the hiring business can satisfy each element of a three-factor “ABC” test:

A.    That 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; and

B.    That the worker performs work that is outside the usual course of the hiring entity’s business; and

C.    That 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.

To meet prong (A), the hiring company may not either exercise control or retain the right to exercise control over the worker. This prong is the most similar to the existing “control” test.

For prong (B), the worker may not be performing work that is a usual part of the hiring entity’s business. For this case, because Dynamex’s entire business was that of a delivery service, whether the drivers who made deliveries for defendant Dynamex were performing the same work being carried on by the business was “clearly” amenable to resolution on a class basis – with the Court tacitly concluding that they were. In contrast, a retail store bringing in a plumber to fix a leak in the store will be able to satisfy prong (B) of the test. Similarly, the Court cited a case holding that entertainers hired by a resort for its guests were performing work within the resort’s usual course of business, because the resort advertised and regularly provided that entertainment. Thus, those entertainers needed to be classified as employees.

Finally, as to prong (C), the hiring entity will be required to show that the worker actually is engaged in an independently established business, with evidence (such as marketing materials) that the independent business is in fact operating, not merely an agreement that says the worker may provide services to others.

In practice, the decision will expand the number of workers who must be treated as “employees” for purposes of essentially all California wage-and-hour regulations, including minimum wages, overtime, and meal-and-rest breaks. It may also make it easier for plaintiffs to bring class actions by reducing the number of factual issues for courts to consider.

This sweeping new decision will have major implications for the classification of workers under California law, and a significant number of individuals currently classified as independent contractors likely will need to be re-classified under this new standard. California businesses should carefully review their classification of independent contractors to ensure that they are in compliance under this new decision.