Anyone with contract workers should assess whether they need to be reclassified as employees.
Last month the California Supreme Court decided the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles County. The case clarified the test for determining whether workers should be classified as employees or as independent contractors for purposes of the California wage orders. The answer was surprising because it rejected the commonly accepted “control” test, in favor of the much narrower “ABC test.”
California is the most protective state in the country for employees. It provides broad protections and rights to workers, and requires employers to comply with extensive legal mandates. If an employer makes a mistake, the consequences can be very expensive, as penalties, interest and attorney’s fees are automatic, even when there is no bad intent.
These broad protections have led some companies to classify workers as independent contractors (the term “independent contractor” and “contractor” are synonymous), because it is less expensive, as contractors are not afforded the protections of these strict laws. Due to the financial incentive for companies to misclassify workers as contractors, the law has continued to narrow the scope of that definition, and to create more and more disincentives (read: heavy penalties) for misclassifying contractors. The default rule is now that a worker is considered an employee unless they meet the strict legal criteria to be properly classified as a contractor.
The new criteria is established in the Dynamex case. The employer in that case, Dynamex, classified all of its delivery drivers as independent contractors. A driver sued for wage and hour violations (overtime, meal and rest periods) on behalf of all drivers. A class action was certified, with the Court addressing the question of whether the drivers were properly classified as contractors, or whether they were entitled to the Wage Order protections afforded to employees. The Supreme Court decided the drivers were employees, applying the “ABC test.”
Under the “ABC Test,” in order to classify a worker as an Independent Contractor, the hiring entity must establish all of the following:
- 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;
- that the worker performs work that is outside the usual course of the hiring entity’s business; and
- 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.
The Court gave several examples to help clarify its intent. For example, the Court contrasted a retail store who hires an outside plumber to repair a leak, and also hires work-at-home seamstresses to make clothes. The Court explained that the plumber is properly considered an independent contractor because he/she is hired to do a specific job the details of which are outside the control of the retail store, the job is not part of the normal operations of the store, and the plumber is in business for him/herself. On the other hand, the Court held that the seamstresses must be classified as employees, even though they work from home, on their own time and using their own equipment. This is because they are completing work that was designed and directed by the retail store, they are producing the items that the store will sell, are not hired for a one-time special project unrelated to the store’s business, and the seamstresses are not in business for themselves.
What this means for you: review the ABC criteria closely to determine whether the contractors working for you are properly classified. If not, convert them to employees. If you have a question or want to make sure you are correct, please feel free to give us a call!
Samantha Pungprakearti is an Associate at Carle, Mackie, Power & Ross LLP and part of its Employment Law Group. Phone: (707) 526-4200. Email:firstname.lastname@example.org.