Classifying, and defending the decision to classify, the independent contractor status of workers in California just became more difficult. Last year on April 30, 2018, the California Supreme Court adopted a new test to determine whether workers are independent contractors or employees under California’s wage orders in Dynamex Operations West, Inc. v. Superior Court. Recently, on May 2, 2019, the federal Ninth Circuit Court of Appeals held that the Dynamex test will apply retroactively. On May 3, 2019, the California Division of Labor Standards Enforcement (“DLSE”) issued a letter opining that the Dynamex test applies to both the Wage Orders and any Labor Code provisions that enforce Wage Order requirements. This means that employers who used independent contractors in the past 4 years may be at a higher risk for claims of misclassification under California’s Wage Orders and other Labor Code violations.

Dynamex’s ABC Test

The test established by Dynamex, referred to as the “ABC” test, is comprised of the following three factors that under California law must be proven by the employer for a worker to be properly treated as an independent contractor:

1. The worker must be free from the control and direction of the putative employer in how he or she carries out his or her tasks. This is consistent with other independent contractor tests in which detailed control typically establishes an employment relationship.
2. The worker must perform a task that is outside the normal scope of business of the putative employer. For example, a worker who services a cake shop’s air conditioning probably satisfies this prong, while a worker who bakes cakes at the cake shoplikely does not.
3. The worker must be customarily engaged in an independent business or trade, reflecting an independent decision on the part of the worker to go into business for him or her self.

In evaluating workers against this backdrop, it is important to remember that there is a legal presumption in favor of the existence of an employer-employee relationship. If a worker brings a claim on the basis that he or she is misclassified and should be treated as an employee for wage and hour purposes under California law, the alleged employer must satisfy each of the 3 factors in the ABC test or the worker will prevail.

You can read our past blog on the Dynamex case here.

You can read the new 9^th Circuit decision here: Vasquez v. Jan-Pro Franchising Int’l, Inc.

You can read the new DLSE Opinion Letter here.

Courts Set Limitations on use of ABC Test

One possible silver lining to the Dynamex decision is that the California Court of Appeals, prior to the issuance of the recent DLSE Opinion Letter, limited the ABC test to claims under California’s Wage Orders, meaning that different standards could apply to different statutory claims. These California Appellate Court decisions include Duffey v. Tender Heart Home Care Agency, LLC decided January 2019 and Garcia v. Border Transportation Group, LLC decided October 2018.

Takeaways for Employers

• Be very careful classifying workers as independent contractors. Under California law, workers are presumed to be employees for wage and hour purposes and can only be independent contractors in narrow circumstances. A worker that performs tasks that are a core part of your business is almost certainly an employee for Wage Order purposes. Particularly, businesses that make use of a large number of independent contractors should exercise caution.
• Watch for New Legislation. Courts or the California Legislature could choose in the future to extend the use of the ABC Test to non-Wage-Order labor protections, the Fair Employment and Housing Act, Workers’ Compensation, and state tax issues, among others. On the other hand, legislation is under consideration that, if passed, would exempt certain industries from the Dynamex ABC Test. This area of the law could change so it is important to stay informed.
• Consult with qualified counsel about classifying workers as independent contractors. If an employer is found to have misclassified workers as independent contractors, the exposure in California may be very costly and includes both wages such as overtime and potentially severe monetary penalties. Some employers wrongly assume that just because they have a signed independent contractor agreement, they have no risk of misclassification. That is a common mistake. While having a well-drafted, signed independent contractor agreement is advisable, it definitely does not by itself mean that a court or administrative agency will find an independent contractor relationship. Instead, the decision will be based on the law which in most cases will mean the new ABC Test adopted in the Dynamex case.
• Learn More. The Dynamex case and the new related developments will be discussed along with other new employment law developments, at our Mid-Year Employment Law Update for California Employers on June 4, 2019. To register call any of our offices or register online at: suttonhague.com/events.