On April 30, 2018, the California Supreme Court made a ruling that may make it difficult for you to classify your workers as independent contractors. Employers in California have traditionally used the set Industrial Welfare Commission (IWC) standards, such as “exercises control”, to determine if a worker was classified as an “employee” or as an “independent contractor”. The Supreme Court is now adopting an “ABC” standard for determining status of employee vs. independent contractors; we recommend that you review your classifications of workers to be in compliance with these new standards.
In Dynamex Operations West, Inc. v. Superior Court, Dynamex contended that the drivers they employed were independent contractors and not employees. In 2004, Dynamex converted all their drivers, who were considered employees at the time, to independent contractors. The drivers filed a claim noting that they were performing the same tasks as independent contractors as when they were employees thus their reclassification was against the law.
From the ruling, the court adopted the “ABC” test for independent contractors. If employers did not meet their “ABCs”, their worker would be considered employees under the California Wage Orders. According to Fisher Phillips, an attorney law group, the court developed the below 3 prongs (ABCs):
“Prong A: “Free From Control And Direction”
The court first discussed the “A” prong, which is akin to the common law control standard. The court concluded that a worker who is, either by contract or by practice, subject to the type and degree of control a business typically exercises over employees should likewise be considered an employee. Accordingly, businesses must now establish that workers are free of such control to meet this part of the test. The court confirmed that a business “need not control the precise manner or details of the work” in order to be found to have maintained the necessary control sufficient to lead to a finding of employee status.
Prong B: “Outside Usual Course Of Business”
Prong “B” seeks to determine whether workers can reasonably be viewed as individuals who are providing services to the business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor. Workers whose roles are “most clearly comparable” to those of employees include workers whose “services are provided within the usual course of the business” and thus would “ordinarily be viewed by others as working in the hiring entities’ business.” Thus, this prong expands those within the definition of employee to include almost any worker who engages in the same business as the hiring entity.
The court used the example of a retailer that hires a plumber or electrician to perform maintenance at their establishment; such a worker would be hiring someone outside of the company’s business and thus would be able to demonstrate independent contractor status. On the other hand, a clothing manufacturer that hires a work-at-home seamstress, or a bakery hiring a cake decorator, would typically not be able to make such a demonstration.
Prong C: Customarily Engaged In Independent Trade
The third “C” prong seeks to identify those workers that have taken steps to create their independent business. If the worker has independently made the decision to go into business for themselves, they are likely to be found as satisfying this third prong. If, on the other hand, they are “simply designated as an independent contractor by the unilateral action of a hiring entity,” there is a substantial risk they will be found to be an employee.
The good news: the court stated that a business does not necessarily have to prove that workers in question took steps such as incorporation, licensure, advertising, and the like to prove this prong. The bad news: the court also stated that the simple fact that a company does not prohibit or prevent a worker from engaging in such an independent business is insufficient to establish a worker has independently made the decision to go into business for themselves.”
Misclassifying a worker can expose you to not only to tax implications but also to additional wage and hour claims. We strongly encouraged you to review and audit your independent contractor workers and their contracts. If you need assistance in determining if a worker is an employee or independent contractor, please contact us.
BY THI HA –
Director of Human Resources Compliance