The California Supreme Court issued a major destabilizing decision that has completely changed the legal landscape and the risks of liability for companies that “hire” individuals as independent contractors. In a case called Dynamex, the California Supreme Court adopted a new ABC test that had been previously adopted by several other states that makes it much harder to qualify as an independent contractor particularly where the putative independent contractor is providing services that are core to the services that the company provides to the public. Under the ABC test, a worker is considered an employee unless the hiring entity establishes all three of the following prongs:
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;
the worker performs work that is outside the usual course of the hiring entity’s business; and
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.
Prong A: “Free From Control And Direction”
The Dynamex court first discussed the “A” prong, which should be familiar to most California companies. This is the right of control standard that has been one of the key factors utilized by the IRS and Franchise Tax Board in defeating independent contractor status. The court concluded that a worker who is, either by contract or by practice, subject to the type and degree of control a business typically exercises over employees should likewise be considered an employee. Under this prong businesses must be able to establish that workers are free of such control in performing their services . The court confirmed that a business “need not control the precise manner or details of the work” in order to be found to have maintained the necessary control sufficient to lead to a finding of employee status. However, if you are controlling the time, place or means by which the putative contractor is performing their services there is a great likelihood that their independent contractor status could be in jeopardy.
Prong B: “Outside Usual Course Of Business”
Prong “B” seeks to determine whether workers can reasonably be viewed as individuals who are providing services to the business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor. Workers whose roles are “most clearly comparable” to those of employees include workers whose “services are provided within the usual course of the business” and thus would “ordinarily be viewed by others as working in the hiring entities’ business.” Thus, this prong expands those within the definition of employee to include almost any worker who engages in the same business as the hiring entity.
Interestingly, in my own training on this topic over the years I referred to this concept as the plumbers test and the Dynamex court actually referred to plumbers as a great example of someone who would qualify as an independent contractor. When your company has a pipe that is leaking, the plumber your company hires does not provide services that your company re sells to its customers and but for your company’s leaking pipe your company would not have hired the plumber. In contrast, when the services the worker is providing are ones that you sell or resell to your customers it will now be very hard to establish these workers as independent contractors.
Prong C: Customarily Engaged In Independent Trade
The third “C” prong seeks to identify those workers that have taken steps to create their independent business. If the worker has established their own business by doing things like purchasing insurance, hiring their own employees, obtaining business licenses and having multiple customers and otherwise acting like a true separate business, they will probably meet the burden for qualifying as a contractor under this prong. However, keep in mind that satisfying this prong by itself does not ensure that they meet the test for independent contractor as the worker has to meet all three prongs. Moreover the mere fact that your company does not prevent these individuals from having their own business is not sufficient to establish independent contractor status; they actual have to be operating their own separate business.
The Risks
The Dynamex court placed the burden of proof on the hiring company to prove independent contractor status. Misclassification of such workers carries with it statutory fines and penalties plus the big risk of a wage hour class action claim if the company engages in this practice with many individuals. Because of this companies should self-audit to see if the contractors they use meet the ABC test. Moreover, this is another instance in which the use of binding arbitration agreements with class action waivers are a necessary first line defense against class actions and the liability exposure they carry with them.
is a partner in the Irvine office of the national law firm of Fisher Phillips, one of the oldest and largest firms in the country practicing exclusively in labor and employment law representing management.
Yonowitz has been practicing labor and employment law representing management since graduating with honors from the George Washington University National Law Center in 1987, where he was a member of the George Washington Law Review. Prior to practicing law, he also worked for the United States Senate Judiciary Committee Subcommittee on Courts.
Yonowitz has deep experience in many aspects of labor and employment law including litigating harassment, discrimination, retaliation, wrongful termination and wage hour class action claims, drafting key executive employment agreements and incentive compensation plans. Yonowitz developed and is the co-chair of the firm’s nation-wide Unfair Competition and Trade Secrets Practice Group.
Yonowitz has published numerous chapters, articles and lectures on the benefits of arbitration, drafting employee agreements, and prevention of employee theft of trade secrets. He is a member of the California Bar, and the Labor and Employment Law Section of the American Bar Association.
For more information, please contact the author, Bob Yonowitz at Fisher Phillips. ryonowitz@fisherphillips.com.