On Monday, the California Supreme Court adopted a new standard for determining whether a worker qualifies as an employee for the purposes of wage-hour law. To the surprise of almost no one, the standard does not bode well for many companies operating in the Golden State.
In a highly-anticipated opinion, Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court held that in order for a worker to be properly classified as an independent contractor rather than an employee, the company bears the burden to show that the individual is performing work that is “outside of the hiring entity’s business.” This standard threatens to put an end to much of the independent contractor workforce in California.
The Court adopted what is known as the “ABC” test of evaluating whether workers classified as independent contractors in fact qualify as employees. The test starts with the presumption that all workers are employees, and utilizes three factors, all of which must be satisfied for an independent contractor classification to pass muster. The first factor – whether the worker is “free from the control and direction” of the company – essentially reflects the current legal standard and is not controversial.
The other two factors, however, threaten to upend the business model used by many companies that rely heavily on independent contractors/agents. The first of these elements, referred to above, requires that the worker perform services “outside of the usual course of the hiring entity’s business.” A strict interpretation of this standard would limit independent contractors to workers who perform services totally unrelated to the company’s core function. The Court offered examples of a retail store that “hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line,” as utilizing legitimate independent contractors. Any worker who participated in any part of the store’s actual business, however, would be considered an employee.
The third part of the ABC test requires that the worker be “engaged in an independently established trade, occupation, or business.” The Court explained that this element is designed to identify individuals who have “made the decision to go into business for himself or herself,” and to prevent companies from “unilaterally determin[ing] a worker’s status by assigning the worker the label ‘independent contractor’ or by requiring the worker, as a condition of hiring, to enter into a contract that designates the worker as an independent contractor.” Signs that an individual has established an “independently established” business would include “incorporation, licensure, advertisements, routine offerings to provide the services of the independent contractor to the public or to a number of potential customers, and the like.”
The ABC standard is already used in some jurisdictions, including Massachusetts, although in some states it is only used in more limited contexts; for example, determining whether a worker qualifies for unemployment insurance. In Dynamex, the California Supreme Court has adopted the standard in evaluating whether workers qualify for California’s minimum wage, overtime, and other wage-hour regulations. Moreover, the basis of the Court’s ruling – ensuring that workers are provided the “fundamental protections afforded by the wage order[s]” — could easily be extended to discrimination statutes and other workplace regulations.
Exactly how the ABC standard will be interpreted by courts remains to be seen. Will ride sharing companies succeed in arguing that their business involves a technology application, rather than a taxi service? Will workers who sometimes provide services to multiple companies qualify as engaging in an “independently established” business? Answers to those questions will take years to be answered. Companies operating in California who utilize independent contractors as a significant part of their operations should not wait that long, however. They would be wise to review their practices and be prepared to modify them or defend them under this new standard.