Calif. Employee-Contractor Ruling Holds Big Implications for Employers, Gig Workers

The California Supreme Court raised the bar on the definition of independent contractor last month when it unanimously adopted a new legal standard for distinguishing between employees and independent contractors – also known as gig workers. An estimated 12.5 million workers – just over 8 percent of the U.S. workforce – fit into this category according to a 2016 study by Harvard and Princeton economists.

Noting that businesses may have substantial economic incentives in mischaracterizing some workers as independent contractors and the risk that workers may be improperly misclassified as independent contractors is significant, the Court reinterpreted the test for determining whether workers should be classified as either employees or independent contractors for the purposes of wage orders adopted by California’s Industrial Welfare Commission.

The Dynamex Operations West, Inc. v. Superior Court ruling applies a worker-friendly standard that puts the burden on the employer to prove that a worker is an independent contractor and not an employee, and replaces the Borello “right of control” standard that had been in place in California since 1989 with the “ABC” test that is already used by several other states.

Under this ABC Test, workers will be presumed to be employees instead of independent contractors for purposes of California’s wage orders, unless the hiring entity establishes each of the following criteria:

1. that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, and
2. that the worker performs work that is outside the usual course of the hiring entity’s business, and
3. that the worker is customarily engaged in an independently established trade, occupation, or business,

The Court stated that, “The hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of the wage order.”

The new California standard will make it riskier for businesses in California to characterize their workers as independent contractors. Part A of the ABC test is like the control standard used in the Borello test. However, parts B and C are new for California, and put the burden on the employer to prove that a worker performs work out of the usual course of the employer’s business (i.e., the individual should reasonably be viewed as providing services to the business in a role comparable to that of a traditional independent contractor rather than in a role comparable to that of an employee) and that the work is engaged in an independently established business (i.e., the worker who independently has made a decision to engage in business for herself such as a plumber or an electrician).

Colorado, however, currently utilizes the “right of control” test to determine whether a worker is an employee or an independent contractor. The Colorado Department of Labor states that the two main concepts used to determine the status of a worker are, as stated in Colorado law:

• Whether or not the individual is free from control and direction in the performance of the service, both under the contract for the performance of service and in fact.
• Whether or not the individual is customarily engaged in an independent trade, occupation, profession, or business related to the service performed.

Under Colorado Law, an individual is presumed to be in covered employment unless and until it is shown that the individual is free from control and direction in the performance of services, both under contract and in fact, and that the individual is customarily engaged in an independent trade, occupation, profession or business related to the work performed.

To create the presumption of an independent contractor relationship, the writing or contract must contain the clauses set forth here that both parties agree to and that, in fact, both parties act accordingly.

The California Supreme Court decision in Dynamex will have far reaching implications for California companies and may have far reaching implications for companies outside of California that don’t currently utilize the ABC Test if those states follow the logic of the California Court and change their laws to utilize the ABC Test.

In its decision, the Court noted the difficulty that courts in all jurisdictions have experienced in devising an acceptable general test or standard that properly distinguishes employees from independent contractors, but it concluded that the ABC Test’s object is to create a simpler, clearer test for determining whether the worker is an employee and place the burden on the hiring entity to establish that the worker is an independent contractor.