California Supreme Court Establishes Employee-Friendly Independent Contractor Test

Author: Michael Cardman, XpertHR Legal Editor

May 1, 2018

A new California Supreme Court ruling makes it significantly more challenging for companies to classify workers as independent contractors rather than employees.

In Dynamex Operations West v. The Superior Court of Los Angeles County, the court established an employee-friendly "ABC test," under which a worker will be considered an employee under California's wage orders unless the hiring entity can show that the worker:

  1. Is free from control and direction of the work, both under the contract and in fact;
  2. Performs work that is outside the usual course of its business; and
  3. Is customarily engaged in an independently established trade, occupation or business.

The ABC test replaces the more employer-friendly test that the California Supreme Court had set forth in its 1989 S.G. Borello & Sons ruling, under which California courts and enforcement agencies weighed several different factors - such as the worker's opportunity for profit or loss, whether the worker was paid by the hour or by the job and the length of time for which the services were to be performed - on a case-by-case basis.

The court said its new ABC test "will provide greater clarity and consistency, and less opportunity for manipulation" than the old Borello test.

While some are predicting the Dynamex ruling could prove disastrous for gig economy companies, others take a more measured outlook.

"It's not a doomsday, and it's not an apocalypse," Richard Reibstein, a partner with Locke Lord LLP, told XpertHR. "It does change the landscape."

Businesses operating in California will need to carefully review their independent contractor relationships to meet the new ABC test, and some may have to restructure, Reibstein said.

It remains to be seen how the Dynamex test will be applied going forward. The biggest uncertainty, said Reibstein, is that there is no legislative history for the courts to turn to when interpreting the ruling because California is the first state to have adopted an ABC test without legislation or regulation. As a result, courts may look to other states to see how they have interpreted their own ABC tests.

Other unanswered questions about the Dynamex ruling include:

  • Will it apply retroactively to claims that predate April 30, 2018 (the date of the ruling)?
  • Will the Borello test continue to apply outside the scope of the wage orders - for example, to workers' compensation claims?
  • Will California's legislature enact a "marketplace contractors" law - like those in Arizona, Indiana and Kentucky, among others - that allow gig economy workers to be considered independent contractors under certain conditions?