California is the birthplace of many of the best-known apps credited – or blamed, depending on your point of view – with fueling the gig economy. But the California Supreme Court issued a ruling on April 30, 2018 that will make it extremely difficult for gig entities and others to treat workers as independent contractors.
The Court issued a lengthy opinion in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Case No. S222732). After describing the history and way in which “employees” and “employers” have been defined in California, the Court adopted a simplified test that tilts toward treating workers as “employees.” The so-called “ABC test” presumes all workers are employees unless the business can demonstrate all of the following: (a) the “worker is free from the control and direction of the hirer in connection with the performance of the work” under the contract and in fact; (b) the “worker performs work that is outside the usual course of the hiring entity’s business;” and (c) the worker is “customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
The test will effectively keep an independent plumber (and presumably, your outside counsel) from being considered an employee. But, in light of this decision, workers who perform tasks that are part of the company’s usual business operation will now most likely be considered an employee – obligating the company to comply with wage-and-hour requirements, unemployment insurance and workers’ compensation obligations, and employer-side taxes.
Prior to Dynamex, there had been disagreement in California over the proper test, but California courts (and federal courts sitting in diversity) generally applied a multifactor test that was broader than but similar to the federal economic realities standard. All potentially relevant factors could be considered, in light of the totality of the circumstances, on a case-by-case basis. The Supreme Court concluded that a more bright-line rule was in order, and so, California joins New Jersey and Massachusetts in creating a presumptive rule against independent contractor status.
The change means that thousands of California workers may now bring claims that they have been misclassified as independent contractors. And the economy that may take the biggest hit is California’s gig economy because it relies heavily on workers that are classified as independent contractors.
Whether in the gig economy or not, all California employers should take a hard look at the independent contractors currently providing services and determine whether they should be reclassified as employees in light of this groundbreaking decision.
A full copy of the Dynamex opinion can be found at: http://www.courts.ca.gov/opinions/documents/S222732.PDF