The New ABC Test for Independent Contractors Spells Serious Trouble for California Businesses
By Procopio Partner Marie Burke Kenny and Associate Annie Macaleer
In a much-anticipated decision, the California Supreme Court on April 30, 2018, held that there is a presumption that all workers are employees, and that a business classifying a worker as an independent contractor bears the burden of establishing that such a classification is proper under a new test called the “ABC test.” Given the increasing prevalence of so-called “gig economy” workers in the state, this decision could potentially impact a wide variety of companies and contractors throughout California.
In Dynamex Operations West, Inc. v. Superior Court, the Court rejected the long-standing multi-factor test in California on the basis that it afforded the hiring business a “greater opportunity to evade its fundamental responsibilities under a wage and hour law” due to its ambiguities. In setting forth a simpler three-factor test, the Court stated its objective was “to create a simpler, clearer test for determining whether the worker is an employee or an independent contractor.”
Under this new ABC test, the hiring business bears the burden of proving each of the following factors to support its independent contractor classification:
(A) 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
(B) the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The second factor of the new ABC test severely restricts businesses from hiring workers as independent contractors because it precludes the hiring of a contractor in any “role comparable to that of an employee.” To illustrate the meaning of the second factor, the Court provided two examples:
- In one example, a retailer that contracts with an outside plumber or electrician to perform such plumbing or electrical services would not be seen as providing services “comparable” to an employee.
- In another example, however, a clothing manufacturer that contracts with a work-at-home seamstress to make dresses from cloth and patterns supplied by the company (and later sold by the company) would be seen as providing services “comparable” to an employee.
Only the first example would satisfy the new ABC test for independent contractors.
Because of the heightened requirements imposed by the Dynamex decision, California businesses that classify workers as independent contractors should immediately review — with qualified counsel — any contractor classification under the “ABC test” to determine whether the classification complies with California law and evaluate the risk of any future classifications. Any business that misclassifies an independent contractor is potentially liable for a host of individual and class action wage and hour claims including claims for unpaid wages (minimum wage, overtime, doubletime), meal and rest period premium pay, penalties and premiums under the California Labor Code, and unpaid benefits. Businesses should also consult their tax counsel regarding the potential tax consequences for misclassifying independent contractors.
Marie Burke Kenny is a Partner at Procopio, a member of the firm’s Management Committee, and the leader of its Labor and Employment Practice Group. She represents employers in wage and hour class actions and litigation involving wrongful termination, discrimination, harassment, retaliation and unfair competition claims. She also has extensive experience counseling employers regarding all aspects of the employment relationship, including performance management, termination, contracts, workplace investigations, medical issues, leaves of absence, wage and hour audits, compensation review, workplace training and employment policies and practices.
Annie Macaleer is an Associate with Procopio and a member of its Labor and Employment Law Practice Group. She counsels employers on effective ways to reduce their risk of litigation through policy changes, employee handbook updates and revisions, and other human resources issues and strategies. Annie primarily focuses on litigation, defending on behalf of employers. She has significant experience implementing aggressive and early defense strategies, and targets cases toward successful summary judgment or adjudication.