The California Supreme Court dealt a severe blow to businesses, restricting the manner in which workers may be classified as independent contractors. On April 30, 2018, the Court issued a decision in Dynamex Operations West, Inc. v. Superior Court which significantly limits the ability to classify workers as independent contractors. Although the workers in the Dynamex decision were drivers, the ruling potentially impacts every industry.
Previously, California followed a multi-factor test which has now been replaced by a different standard referred to as the “ABC” test. Under the new analysis adopted by the Court, workers are presumed to be employees unless all of the following tests are met:
A. Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
B. Does the worker perform work that is outside the usual course of the hiring entity’s business?
C. Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?
In its decision, the Court referenced that both federal and state governments have declared losing billions of dollars in tax revenue due to worker misclassification. As a result, employers can expect an increase in claims based on independent contractor classifications.
Businesses should conduct a review of their independent contractor arrangements to determine whether they meet the new ABC test. Contractor relationships that do not meet the test will require attention, which may include reclassifying workers. The manner in which reclassification is conducted should be given significant consideration to minimize the chance of a claim. Employers who misclassify employees face the potential for stiff fines and payroll tax obligations. Misclassification impacts additional areas as well, including the risk of claims for unpaid minimum wage, overtime, meal and rest break premiums, and benefits.
If you have independent contractors, it is a good time to work with an employment attorney to review those relationships, and reclassify workers if necessary in light of the Dynamex decision. Questions about how the ABC test affects your business may be directed to the employment attorneys at Ferruzzo & Ferruzzo, LLP. We are here to help.