California Supreme Court Decision Announces a New Independent Contractor Test

Employment and Labor Update

California Supreme Court Decision Announces a New Independent Contractor Test

A recent unanimous decision by the California Supreme Court will have a major effect on California employers’ ability to classify service providers as independent contractors. This ruling will likely have significant implications for businesses throughout California, particularly those that utilize independent contractors in their day-to-day operations.

In Dynamex Operations West v. Superior Court, delivery drivers brought a class action alleging that the company had misclassified its drivers as independent contractors, thereby improperly denying the drivers overtime pay and other benefits under the applicable Wage Order and the California Labor Code. At issue in the decision was the applicable standard for determining whether the drivers are employees (in which case, various employment rules, such as entitlement to overtime, would apply) or independent contractors.

Dynamex advocated for use of the Borello test, which is a totality of the circumstances test that considers factors such as the worker’s skill and the nature of the company’s business but primarily assesses whether the company is exercising a sufficient level of control over the manner and means by which the work is performed. The California Supreme Court rejected the Borello test in favor of a more restrictive “ABC test.”      

Under the “ABC test,” workers are presumed to be employees unless the business can demonstrate each of the following factors:

1. 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 such work and in fact; and
2. The worker performs work that is outside the usual course of the hiring entity’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The “ABC test” stands in a stark contrast from other tests, not only because the test significantly minimizes the amount of emphasis that is placed on evaluating the level of control exerted by the hiring entity, but also because it significantly increases the focus on ensuring that individuals who are performing services that are directly related to the hiring entity’s product or service offerings are classified as employees, not independent contractors.

With this change in California law, businesses are wise to examine each independent contractor relationship they maintain with individuals who reside or perform services in California. Businesses should examine the nature of the work performed by those currently classified as independent contractors and focus not only on the level of control over those workers, but also on how that work fits in with the entity’s usual business and whether the independent contractors actually have their own separate, independent businesses.

Moreover, since certain border states, such as Nevada and Arizona, often look to California law for guidance on employment law issues, it is possible that this ruling could eventually extend beyond California’s borders.

If businesses have concerns regarding the new California independent contractor test and its impact in both California and border states such as Nevada and Arizona, they are encouraged to reach out to any of the attorneys in Fennemore Craig’s Labor and Employment group for assistance. For California and Nevada employment law issues, please contact Shannon S. Pierce, spierce@fclaw.com.