ARE ALL INDEPENDENT CONTRACTORS NOW EMPLOYEES?

Last week the California Supreme Court issued a decision that changes the way California employers do business.  In Dynamex Operations West, Inc. v. Superior Court,  the Court held that a three factor test called the “ABC test” must be applied to determine if an independent contractor is actually an employee subject to the California Wage Orders.  The Court described the test as follows: “Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (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.”

I won’t lie to you: the new California Supreme Court case is a pretty devastating case for employers in California.  It goes against all of the tests currently used by various California and federal government agencies by setting a higher standard which is both simple and rigorous.  While it has not yet been applied to withholding obligations, I see no real reason to draw a distinction between the independent contractor tests used by the Employment Development Department and other state agencies and the wage and break standards addressed by the decision.  Indeed, the ABC test is easier to apply and will undoubtedly result in more taxes being paid to the state.  I would therefore expect the EDD and other California agencies to issue new standards and to begin following this case law in the future.

So what does this mean to California employers now?  Any independent contractor could use this case to file a claim against any employer for meal and rest breaks, overtime, or unpaid minimum wages, depending on what the contractor did for the business, with the California Labor Commissioner (the Division of Labor Standards Enforcement) or in a court of law.  Also, any independent contractor that files a claim for unemployment insurance benefits could trigger an inquiry or audit by the EDD.  I would therefore urge that employers use this case as an opportunity to review each independent contractor relationship and make some hard decisions about whether the person is properly categorized as an independent contractor.

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