California employers need to be aware of the impact of a California Supreme Court decision from April 2018 which makes it harder for employers to classify their workers as independent contractors. Employees who prefer to be categorized as independent contractors should also take note because employers will need to change the worker’s status even if it is ultimately not beneficial to the employee.
The California Supreme Court was unanimous in its decision approving a new test for determining whether a worker is an employee or an independent contractor in the case Dynamex Operations W. v. Superior Court.[1] The class action lawsuit was brought by a group of individuals who worked as couriers for Dynamex Operations. They claimed they had been misclassified as independent contractors and should have enjoyed the benefits of being employees, such as breaks and overtime pay. The ruling did not resolve the case but clearly defined a test for lower courts to follow.
The court indicated that wage and hour laws are meant to protect workers’ health and safety. In the decision, Chief Justice Tani Cantil-Sakauye wrote “When a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor . . . . there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification.”[2] Misclassification of workers as independent contractors causes California to miss out on roughly $7 billion in payroll taxes.[3]
The standard adopted by the court presumes that all workers are employees instead of contractors, with the burden now on the company to show that an individual is an independent contractor and not an employee. The new ‘ABC test’ indicates that a worker is an independent contractor only if the hiring entity establishes all of the following: (A) the worker is free from the control and direction of the hirer; (B) the worker performs work 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 for the hiring company.
This ruling raises issues that are facing many companies, specifically those in the app industry (such as Uber and Lyft) and smaller entertainment companies. Those who may be negatively affected also include the workers who prefer being classified as independent contractors in order to control their own hours and bring more money home from work. Large companies have already started to lobby against the court ruling to prevent having to pay extra taxes and overtime for workers who work off the clock. For companies who depend on independent contractors, switching to employee status for their workers may mean that their current workforce will have to accept lower wages or face being replaced in order for the company to continue making the same profits.
If you are an independent contractor who may be misclassified or an employer who may need to reclassify your workers, and you have questions, contact our offices.
[1] Dynamex Operations W. v. Superior Court, 4 Cal. 5th 903, 232 Cal. Rptr. 3d 1, 416 P.3d 1 (2018).
[2] Id. at 909-10
[3] Maura Dolan & Andrew Khouri, California’s top court makes it more difficult for employers to classify workers as independent contractors (Apr 30, 2018, 7:15 PM) available at https://www.latimes.com/local/lanow/la-me-ln-independent-contract-20180430-story.html.
