Independent Contractor Status in California Now Falls Under Radically Different Rules

The California Supreme Court has issued a landmark decision drastically redefining who can be classified an independent contractor.  Dynamex Operations West, Inc. v. Superior Court.  The new criteria potentially expose tens of thousands of businesses who have relied on the old rules to legal actions for unpaid minimum wage and overtime, deprivation of meal and rest breaks, and other alleged violations of this state’s Industrial Wage Orders.

Since 1989, California has relied on a flexible multi-factor standard for distinguishing contractors from employees, most importantly a company’s control over work details.  S. G. Borello & Sons, Inc. v. Department of Industrial Relations.  

The Dynamex Court pronounced its near-inflexible determination to treat workers engaged in labors central to a company’s products or services as employees, citing the economic incentives and competitive advantages to businesses that misclassify workers as independent contractors.

Thus, to establish a worker is properly classified as an independent contractor, a hiring company must now prove all three prongs of an all-or-nothing “ABC” test:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such 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 of the same nature as the work performed for the hiring entity.

While (A) and (C) factors are familiar, (B) is an expansive and rigid take on who must be considered employed in a business’s operations.  For example, for some decades, general building contractors have hired independent sub-contractors to perform particular portions of a construction job, masonry, plumbing, electrical, etc.  The Dynamex decision now casts that traditional relation in doubt.  On the other hand, under Dynamex a building owner who directly hires a series of specialty contractors to perform work on his or her property would likely not be the employer of those service providers if he/she can be fairly considered as not in the business of construction.

Needless to say, this new standard is bound to create a period of uncertainty as government, attorneys and courts work to sort out the many questions arising from the decision.  Particularly any enterprise that relies heavily on hiring independent contractors to produce any part of its goods and services should urgently address the impact of this decision on its operations.

For further information, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.

Helena Kobrin

June 1, 2018