2018

In a significant decision for employers, the California Supreme Court adopted a new test for determining whether an individual worker is an independent contractor or an employee under California wage orders, which regulates minimum wage, overtime, meal and rest breaks, and other conditions of employment. Adopting a modified version of a test from other jurisdictions referred to as the ABC test, a worker is presumed to be an employee unless the hiring company can establish each of the following factors: (A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work; (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. By placing the burden on the employer to establish each of three prerequisites, the Court has made it more difficult for companies to classify an individual as an independent contractor under California wage and hour laws

           Under the test adopted in Dynamex Operations West v. Superior Court, the Court sought to bring within the “employee” classification all individuals who can be reasonably viewed as working in the hiring company’s business. As an example, the Court noted that when a retail store hires an outside plumber or an electrician to repair its facilities, the services provided by the plumber or electrician are that of “a traditional independent contractor,” which are not within the store’s usual course of business.  According to the Court, such a worker is “realistically understood . . . as working only in his or her own independent business.” On the other hand, when a clothing manufacturer hires work-at-home seamstresses to make dresses from material and patterns supplied by the company, the seamstresses are properly classified as employees because they are performing services within the company’s usual business operations. Hence, under the second prong of the test, an individual is not an independent contractor unless his or her work has no material relationship to the company’s business.

           In adopting the ABC test, the Court abandoned the Borello test, a multi-factored test that focuses primarily on the company’s right to control the manner and means by which the worker performs his or her services. However, the Court limited application of the ABC test in determining whether there is an employment relationship under the California wage orders. Acknowledging that different tests may be appropriate for resolving the issue under different statutory schemes, the Court appears to leave in place the Borello test in determining whether a worker is an employee or independent contractor under different statutes, such as the Workers’ Compensation Act.

           By adopting the ABC test, the Court sought to provide an interpretation of the wage orders that is faithful to their fundamental purpose and which will provide greater clarity and consistency. However, by abandoning the Borello test, the Court has also dispensed with decades of appellate court decisions interpreting and applying the former test. More importantly, as the Court itself acknowledged, the new ABC test is stricter than the previous Borello test. Accordingly, companies should closely evaluate their independent contractor relationships in order to avoid future misclassification litigation. If you have any questions regarding the proper classifications of your workers, please feel free to contact me.