California Supreme Court Establishes Three-Part “ABC” Test for Independent Contractor Analysis

The California Supreme Court issued a major decision on Monday, April 30, 2018 that significantly impacts all California employers (Dynamex Operations West, Inc. v. Superior Court, see http://www.courts.ca.gov/opinions/documents/S222732.PDF). Employers have long struggled to determine what differentiates an employee from an independent contractor and the traditional test used by the California courts prior to April 30, 2018 often failed to provide a clear answer. Under the California Wage Orders, which guarantee employees a minimum wage, overtime compensation, and meal and rest breaks (among other regulations), the relevant independent contractor test has now changed dramatically. As of April 30, 2018, all California workers are presumed employees unless the employer can show that a worker is an independent contractor by meeting the three-part “ABC” test. In order to appreciate the massive impact that this decision will have on employers in California, it is important to first understand the history of the independent contractor analysis.

For decades prior to the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court, the primary factor in determining if a worker was an employee or an independent contractor was whether the business had the right to control the manner and means by which the worker accomplished the desired result. In laymen’s terms, the hallmark of an independent contractor was that they had the freedom to choose how and when to perform the job. Notably, drivers for ride share apps (Uber, Lyft) and food delivery apps (Door Dash, Postmates, Uber Eats, Grub Hub) were often considered to be independent contractors because drivers may turn the app on or off at a moment’s notice, allowing them control over when, where and for how long they worked. Since these drivers were considered independent contractors, businesses such as Uber and Lyft thrived, in part because their labor costs (and legal liability) were significantly lower than their competitors (i.e. traditional taxi companies). For instance, ride-share businesses were not required to pay federal and state employment-related taxes, to provide worker’s compensation insurance to their drivers, nor did these businesses have to comply with the numerous other state and federal laws governing wages, hours and working conditions of employees. Ride-share businesses were also typically able to escape legal liability for accidents caused by one of their drivers.

However, under the traditional test, California courts also considered eight “secondary factors” set forth in the Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations. This created a rather nebulous, multi-factor test to determine the nature of the employment relationship. As a result, whether an individual was an employee or independent contractor was often open to interpretation. This is no longer the case.

In its decision in Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court dramatically changed the landscape of the traditional independent contract test by declaring that all workers are presumed to be employees unless an employer can prove otherwise using the three-prong “ABC” test. In order for a business to establish a worker as an independent contractor, it must meet all of the following requirements:

1. The business must not be able to control or direct what the worker does, either by contract or in actual practice;
2. The worker must perform tasks outside the organization’s usual course of business. Thus, drivers for a ride-share business (whose usual course of business is providing rides) cannot be independent contractors no matter how little control the business has over them; AND
3. The worker must be engaged in an independently established trade, occupation or business. It is no longer sufficient for a business to rely upon the argument that the worker is free to work for others. The finder of fact will also investigate to see if the worker’s business is incorporated or licensed and advertises its services, and if it offers its services to the public or other potential customers in addition to the business.

Again, it is the business’ responsibility to meet all three “ABC” requirements in order to establish a worker as an independent contractor. If the business fails to satisfy one of these requirements, the worker is entitled to be treated as an employee under the California Wage Orders. Although all three of the “ABC” requirements were previously listed in the multi-factor test adopted in Borello, the Supreme Court has now clarified that all three “ABC” requirements must be present for any worker to be properly classified as an independent contractor. Thus, the onus is on businesses to prove all of the elements of this test with regard to their independent contractors or to convert their independent contractors into employees.

The ramifications and consequences of the Dynamex Operations West, Inc. v. Superior Court decision are significant. Many businesses should re-analyze whether re-classification of their independent contractors is necessary. If so, businesses will need to alter their relationships with their independent contractors to meet the “ABC” requirements or convert them into employees, and carry the significant responsibility and financial burden such conversion precipitates.