Independent Contractor or Employee? The Answer Just Changed.

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The test for whether a California worker is an employee or an independent contractor just changed.

California courts and government agencies facing this question have long used complex multi-factor tests with outcomes that are difficult to predict. On April 30, 2018, in Dynamex Operations West, Inc. v. Superior Court (S222732), the California Supreme Court replaced that system – for some but not all purposes – with a new three-part test. The effect of this test is likely to be that many workers who companies have treated as independent contractors will now be deemed employees for certain purposes.

The New Test

For purposes of the state Industrial Welfare Commission’s (“IWC’s”) Wage Orders, a worker will now be deemed an employee unlessthe employer can show all of the following: (a) the worker is free from the control and direction of the hirer in the performance of the work, both under the contract for the performance of the work 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. Various forms of this test have been used for years in different states and different contexts around the country, and it is generally called the “ABC Test”. Note again that it places the burden on the employer, and that all three prongs must be satisfied to avoid having the worker be deemed an employee.

When It Matters

The new test formally applies only in the context of the IWC’s Wage Orders. There are 17 of these (plus the minimum wage order) and they vary by industry and by the type of work an employee does, but they cover every employee in California. They establish the minimum wage and generally cover such issues as meal periods and rest breaks, overtime, reporting time pay, workplace conditions, and wage records maintained by the employer.

The Court made clear that the Wage Orders are meant to apply very broadly and that everyone who is not in the business of providing specific services to a variety of clients – for example, the plumber or electrician hired by a shop to do a repair, or the solo attorney drafting contracts for different businesses – is likely to be deemed an employee covered by the applicable Wage Order. Most notably, anyone who provides services that are part of a business’s line of work (such as programmers writing code for a software company) will be an employee, even if only part-time.

When It May Not Matter

As a practical matter, this will have a limited impact on large companies such as Uber that have many “independent contractors.” Most such companies use contractor agreements that require individual arbitration to resolve a dispute, and waive the right to class actions. Most wage-and-hour litigation involves relatively minor penalties that only appeal to attorneys when many such cases can be lumped together and litigated as a class action.

This decision also will not affect the exemptions in each Wage Order that apply to certain executives, administrators and professionals (usually just called “exempt personnel”), and which mean such employees do not receive overtime pay, et cetera.

For employment-law purposes other than the IWC’s Wage Orders, analysis will proceed under the same basis as before – in most instances, the multi-factor “Borello test” will apply. However, that could change as courts evaluate the ABC test and the approach explained in Dynamex.

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