California Supreme Court Opinion New Paradigm in Test for Independent Contractors
The California Supreme Court just radically altered the test for who is or is not an independent contractor (Dynamex Operations West, Inc. v. Superior Court.) Whether a worker is an independent contractor or an employee is the critical question to determine the application of Federal and State wage and hour laws, the jurisdiction of the Division of Labor Standards Enforcement, Employment Development Department, Franchise Tax Board, IRS, Workers Compensation. Appeals Board and a host of other State and Federal laws.
California’s Industrial Welfare Commission (“IWC”).
“ABC test” used in some other jurisdictions.
California had a number of different definitions for determining whether an individual is an employee depending on the applicable statute or regulation. There were anywhere from between 6 and 18 factors to consider, no one of them conclusive in itself, considered in balance with all the other factors. Now there is only one—”suffer or permit to work.” To determine whether an employer has “suffered or permitted” an individual to work the employer must establish three factors known as the “ABC test.” If the employer fails to establish any one factor the worker is NOT an independent contractor. The factors are:
(A) that the worker is free from the control and direction of the hiring entity in connection with
the performance of the work, both under the contract for the performance of the work and in
(B) that the worker performs work that is outside the usual course of the hiring entity’s
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The court’s opinion offers some guidance as to how to apply the three-part test.
(A) How to satisfy this part of the test depends on the nature of the business. Again, quoting from the opinion—”For delivery service, those aspects include obtaining customer/customer service, prices charged for delivery, routes, delivery schedules, and billing. Plaintiffs contend that these factors are all controlled by Dynamex because it obtains the customers, maintains a centralized call system, maintains a package tracking system, sets the prices for its services and customers are billed by Dynamex. . . . There is also evidence that customer service is handled by some of the drivers, depending on the customer’s relationship with that driver. Finally, the defendant does not necessarily control the drivers’ delivery schedules, as a number of drivers state that their only obligation is to complete the deliveries by the end of the business day.”
(B). “[W]hen a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as . . . an employee. On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company . . . or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes . . . , the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed . . . as employees.”
(C) Does the worker perform the same services for other employers or did the worker have employees of his or her own? Did the worker independently choose the burdens and benefits of self-employment? Generally, such an individual “takes the usual steps to establish and promote his or her independent business — for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.”
Employers in California that have independent contractors should immediately review their relationship using the “ABC test” to determine whether such workers should be reclassified. The penalties for violating Section 226.8 include fines between $5,000 and $15,000 per violation of the law, in addition to any other fines allowed by law. If the employer is engaged in a pattern or practice of violating this law, the fines are increased to between $10,000 and $25,000 per violation.
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