CALIFORNIA SUPREME COURT ANNOUNCES NEW TEST FOR DETERMINING INDEPENDENT CONTRACTOR STATUS IN WAGE & HOUR CONTEXT

By Noah J. Woods, Partner

On April 30, 2018, the California Supreme Court issued its decision in Dynamex Operations West, Inc. v. Superior Court, announcing a new test for determining whether a worker is properly classified as an employee or an independent contractor. The new standard adopted by the Court (referred to as the “ABC Test”) places the burden on the hiring entity to establish: (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, (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. The Supreme Court held that a hiring entity’s failure to prove any one of these three prerequisites will be sufficient to establish that the worker is an employee, rather than an independent contractor, under the “suffer or permit to work” standard in the IWC wage orders.

The case involved a package and document delivery company that provides courier and delivery services to the public and to several large companies nationwide. The company hired delivery drivers and classified them as independent contractors. Such drivers were required to provide their own delivery vehicles, and pay for their own transportation expenses, including fuel, tolls, vehicle maintenance, vehicle liability insurance, etc. Drivers were free to set their own schedules so long as they informed the company what days they intended to work. The company paid these drivers either a flat fee or a percentage of the delivery fee the company received from the customers for their services.

A class of delivery drivers argued that they had been misclassified as independent contractors and that they should have been treated as employees. They argued that based on this misclassification, the company had violated various state wage and hour laws and were entitled to damages for unpaid wages, etc. The company argued that the delivery drivers had significant control over their own working conditions, were able to set their own hours, and drive for multiple companies. After announcing the new test, the Supreme Court concluded that the company had failed to establish the three “ABC” factors necessary to lawfully classify the delivery drivers as independent contractors.

Based on the Supreme Court’s decision, companies who utilize independent contractors are encouraged to reevaluate these classifications to ensure compliance with the new “ABC Test” announced by the Court.  Whether a worker should be properly classified as an employee or independent contractor has substantial implications for both workers and businesses. For instance, if a worker should properly be classified as an employee under the law, the business bears the responsibility of paying social security and payroll taxes, unemployment and workers compensation insurance, and for complying with relevant state and federal laws governing wages, hours and working conditions of employees. Accordingly, Companies who incorrectly classify workers as independent contractors, whether intentionally or not, may face significant legal liability.

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