Cal Supreme Court Establishes New Test for Employees v Independent Contractors

The California Supreme Court just issued a decision that seeks to stop the misclassification of employees as independent contractors. Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018). The unanimous decision is certain to have a huge impact in the tech sector where startups too often rely on the independent contractor classification to cut costs and in the sharing economy which relies heavily on the status of their workers as independent contractors. (See Is Your Contractor an Employee and Why it Matters?)

The Court explained that this is an important matter of public policy since misclassification gives an

unfair competitive advantage the business may obtain over competitors that properly classify similar workers as employees and that thereby assume the fiscal and other responsibilities and burdens that an employer owes to its employees. In recent years, the relevant regulatory agencies of both the federal and state governments have declared that the misclassification of workers as independent contractors rather than employees is a very serious problem, depriving federal and state governments of billions of dollars in tax revenue and millions of workers of the labor law protections to which they are entitled.

To reign in abusive misclassification, the court embraced an “ABC test” applied in many states that a worker can be properly considered an independent contractor

only if the hiring entity establishes:

(A) that the worker is 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 such work and in fact;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity

By way of illustration, the court explained by contrasting a proper use of independent contractor status . . .

when 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 having . . . permitted the plumber or electrician to provide services to it as an employee.

With an improper use of the classification.

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 having . . . permitted the workers to provide services as employees. In the latter settings, the workers’ role within the hiring entity’s usual business operations is more like that of an employee than that of an independent contractor.

The case involved a transportation company that was subject to a statewide wage order that governed “all persons employed in the transportation industry.” In reaching its decision, the court explained that

Treating all workers whose services are provided within the usual course of
the hiring entity’s business as employees is important to ensure that those workers
who need and want the fundamental protections afforded by the wage order do not
lose those protections. If the wage order’s obligations could be avoided for workers who provide services in a role comparable to employees but who are willing to forgo the wage order’s protections, other workers who provide similar services and are intended to be protected under the suffer or permit to work standard would frequently find themselves displaced by those willing to decline such coverage.