California Adopts New Independent Contractor Test

May 22, 2018

In a recent case, the California Supreme Court adopted a new standard for determining when a worker is an independent contractor, and when a worker is an employee. This is a major departure from how workers have been classified in the past, and will have far-reaching effects on employment and the gig economy.

The case, Dynamex Operations West, Inc. vs. Superior Court, involved delivery drivers for a parcel delivery company. Under the new, 3-factor “ABC” test adopted by the Court, a worker is presumed to be an employee, and will only be considered an independent contractor if:

1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract and in fact;
2. The worker is performing work that is outside the usual course of the hirer’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work being performed.

All three factors must be satisfied, or the worker will be re-classified as an employee. In adopting the new ABC test, the Court abandoned the traditional “right to control” test, which looked at numerous indicators of control, none of which was dispositive.

To see how this new test will play out, let’s look at an example of a software company that engages software developers, but wants to classify them as contractors. The company may tell the developer that it needs software in place to protect data security from hackers. The company may not give the developer any directions as to how to write the code for that software, and may not require the developer to do the work onsite, which may satisfy the first part of the ABC test. Also, the developer may be doing a lot of freelancing in the area of data security for different companies, satisfying the third part of the test. The problem is the second part. If the company is a software company, then software development could very likely be considered within the usual course of its business. The same analysis might apply to a package delivery company that wants to classify its delivery persons as contractors. On the other hand, a retail clothing chain that hires a software developer to work on its customer database may have a better chance of classifying that developer as a contractor.

Consequently, companies in California that use contractors need to take a hard look at how the relationship is set up. It is quite likely that under the new ABC test, many of those contractors will need to be reclassified as employees.

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