The California Supreme Court established a new three-part test to determine whether a purported independent contractor should be classified as an employee covered by California’s Wage Orders. Dynamex Operations West, Inc. v. Superior Court, Case No. S222732 (Apr. 30, 2018). Rejecting the longstanding nine-factor test articulated in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, the Court adopted an “ABC” test which presumes a worker is an employee unless three criteria are met: (1) the worker is free from the hiring entity’s control and direction; (2) the work is outside the hiring entity’s usual course of business; and (3) the worker is customarily engaged in an independently established trade, occupation, or business. Following this decision, businesses retaining individuals in California as independent contractors should reexamine those relationships.

The Supreme Court’s Analysis in Dynamex

In Dynamex, a class of delivery drivers sued a nationwide package and document delivery company, claiming they had been misclassified as independent contractors. The drivers provided same-day courier and delivery services, including delivering purchased goods and picking up returns from customers.  Dynamex obtained its own customers and set the rates to be charged to those customers for its delivery services, but drivers were free to set their own schedules and determine the sequence and routes of deliveries. The drivers were required to provide their own vehicles and pay for all associated transportation expenses.

The sole question before the Dynamex court was whether the Court of Appeal had applied the correct definition of “employ” and “employer” under the applicable Wage Order in upholding the trial court’s order certifying the class. Writing that resolution of the employee/independent contractor question should focus on “the intended scope and purposes of the particular statutory provision or provisions at issue,” the court determined that the “ABC” test, utilized in other jurisdictions, was most consistent with the broad protections afforded by California’s Wage Orders.

The “ABC” Test for Independent Contractors Under California’s Wage Orders

Following the Dynamex decision, companies classifying workers as independent contractors to whom California’s Wage Orders do not apply must prove that the workers satisfy all three elements of the “ABC” test: 

A.     The workers must be 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 the work and in fact.
 

An entity seeking to classify workers as independent contractors must present proof of the workers’ independence and demonstrate that the entity does not control and direct the workers. A reviewing court will consider whether the entity exercises the type and degree of control that the entity would normally exercise over employees. The Court specifically warned that a business “need not control the precise manner or details of the work” to defeat this factor. This factor relies upon both the degree of control articulated in the contract between the parties, and the degree of control exercised over the actual work performance.

B.     The workers must perform work that is outside the usual course of the hiring entity’s business.
 

To be properly classified as an independent contractor under the Wage Orders, the worker must perform work that is outside the scope of the hiring entity’s business. By way of example, the Dynamex court explained that an electrician hired by a retail store to install a new electrical line would typically not be considered an employee of the store. By contrast, however, cake decorators regularly hired by a bakery to design custom cakes are likely to be considered employees, according to the Court.

C.     The workers must be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. 
 

The Dynamex court cited the common understanding that an “independent contractor” typically has “independently” made the decision to go into business for him or herself by establishing and promoting his or her independent business through incorporation, licensure, advertising, or other means.  The Court emphasized that a hiring entity cannot unilaterally classify an individual as an independent contractor or, as a condition of hiring, require that individual to sign a contract designating him or her as an independent contractor.

Significance for Hiring Entities

The Court did not opine as to whether the “ABC” test will be applied to claims other than those brought under the Wage Orders. But Wage Order application alone imposes liabilities and penalties for hourly and overtime pay, meal and rest breaks, and many other mandates.  Moreover, the Court offered little comfort that this analysis is solely limited to the Wage Orders.

In any event, entities doing business in California should evaluate whether their workers classified as independent contractors meet all three factors of the ABC test articulated in Dynamex. That examination requires not only a review of any independent contractor agreements, but also a review of the actual work performed by workers classified as independent contractors.

Doug Dexter is a partner, Rebecca Stephens is an associate and Jacqueline Menendez is a law clerk in Farella Braun + Martel’s employment law practice in San Francisco.