California businesses are continuing to struggle to make sense of this year’s Dynamex v. Superior Court case, in which the California Supreme Court radically modified the test for determining whether someone working for a business is an employee or an independent contractor. Casting aside decades of developed multi-factor tests, the Supreme Court alighted on a new, simple, three-factor test. Under this test, to prove a worker is an independent contractor and not an employee, a business must show all three of the following:
- It is not able to control or direct what the worker does, either by contract or in actual practice.
- The worker performs tasks outside of the entity’s usual business.
- The worker is engaged in an independently established trade, occupation, or business.
Factor A recalls the “control” test California employers have grown accustomed to using. A business seeking to engage an independent contractor should allow the individual wide latitude over how, where, when, and in what order tasks are completed, focusing instead on a final deliverable result. Factor C establishes an objective criterion that employers can meet by working with individuals who have incorporated or licensed businesses or engaging and paying the entities, not the individuals, directly. Factor B continues to present the greatest challenge to established models because if what the worker produces or sells is the very product or service that the business offers the public, it will be nearly impossible to meet this criterion.
Some employers, particularly those in the “gig economy” that is heavily reliant on individuals providing the companies’ services to other individuals such as Uber, Lyft, Instacart, DoorDash, Postmates, TaskRabbit, Square, Total System Services, and Handy, have responded by lobbying to take action to modify the ruling. In an August letter to Governor Brown, these “gig” companies suggested steps such as an executive order barring state agencies from implementing the ABC test, and sponsoring legislation to overturn it and craft a workable, fair test that protects individuals in the gig economy while preserving its general parameters. The California Chamber of Commerce’s “I’m Independent” Coalition, the Internet Coalition (which counts Google and Facebook as members), and the Western States Trucking Association also have announced plans to lobby for change, with WSTA even going so far as to file a federal lawsuit seeking to nullify Dynamex.
Outside of the gig economy, employers in almost every industry may face the temptation, as Dynamex Operations West, Inc. did, to avoid the hassles and expenses of employment by simply converting an entire workforce from employee to independent contractor. In light of the Dynamex decision, it is unlikely that an employer would take such a step, but many employers utilizing independent contractors may have contractual arrangements and factual circumstances that would have passed muster under the old system, but will not survive the ABC test. While getting involved with the Chamber of Commerce and other organizations to lobby for change is an excellent idea, until those efforts become a reality, businesses must thoroughly review all of their independent contractor relationships, using the guidance of trusted labor and employment counsel. Businesses who classify individuals as independent contractors do not comply with a variety of rules, including providing workers compensation insurance, providing accurate paystubs with each paycheck, providing meal periods and rest periods, and more. Misclassification, if determined later by a court, will also lead immediately to findings of numerous violations. Therefore,Dynamex significantly raises the stakes on the classification decision.