California's New Contractor Status Test Not Really as Simple as ABC

 

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June 12, 2018
On April 30, 2018, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court, which established a new legal standard for classifying workers as employees or independent contractors for the purposes of the wage orders adopted by California’s Industrial Welfare Commission (IWC), established in 1913 to regulate wages, hours, and working conditions in California. 
 
The Court replaced the almost 30-year-old Borello test in favor of a more worker-friendly standard that presumes all workers are employees instead of contractors and places the burden on the hiring business to show that the independent contractor classification is proper under the newly adopted ABC test.
 
Under the ABC test, a business must establish each of the following three factors to properly classify a worker as an independent contractor:
 
A.  The worker is free from the control and direction of the hirer in connection with the performance of the work; and
 
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 the work performed.
 
"The newly formed ABC test will now serve to cast a much wider net on the worker classification pool," says Angela De La Housaye, business attorney and founder of De La Housaye & Associates, a general practice law firm headquartered in the San Francisco Bay Area. "In particular, the second prong of this cumulative test will be a problem for most employers, requiring that the contractor’s work is outside of the hiring company’s scope and core product or service."
 
While not giving legal advice, De La Housaye does point out that "This is already an area of law that a lot of our clients find challenging, when they have true contractors hired by their companies." 
 
This new framework could make it significantly more difficult for companies to classify workers as independent contractors because failure to establish any one of the three factors will result in a determination that the worker is an employee as a matter of law, though it came under review as a Welfare Commission Wage order. De La Housaye suggests that any business that utilizes independent contractors should consult with legal counsel to consider whether those workers are properly classified under the new ABC test to ensure full compliance with the law and avoid significant penalties. 
 
If a worker is classified as an employee, the employer is responsible for paying Social Security and payroll taxes, state employment and unemployment insurance taxes, providing workers’ compensation insurance, and complying with state and federal statutes governing the wages, hours, and working conditions of employees. Consequently, failure to comply with such responsibilities due to misclassification of workers can result in significant legal exposure with respect to wage and hour compliance. 
 
“Representing employers, we find that they are typically trying to do the right thing, but there is not just one governmental entity or set of statutes with which to comply—there are several with multiple tests," says De La Housaye. "This new ruling could lead to a new level of scrutiny that could have the effect of saying 'If you’re engaged in any work that we already perform, you’re de facto our employee.'"
 
 
About De La Housaye & Associates - 
www.delahousayelaw.com
De La Housaye & Associates is a general practice law firm headquartered in the San Francisco Bay Area specializing in business law and civil litigation. The firm was founded in 2000 with the goal of providing businesses with a combination of large firm expertise and small firm accessibility and care. With offices in Walnut Creek, San Francisco and Los Angeles, De La Housaye & Associates has successfully guided its clients through a broad spectrum of business and litigation matters, including contract drafting and disputes, business formation and dissolution, mergers and acquisitions, labor and employment practices and litigation, and real estate related claims. 

 
Contact:
Angela De La Housaye, Owner & Business Attorney
(925) 944-3300