In a landmark decision, the Supreme Court of California in adopted a new test to determine whether a worker performing services for a company is an employee or an independent contractor under Californiaâs wage orders. The new three-factor test, known as the ABC test, will determine whether a company âemploysâ a worker under the wage orders, which address certain requirements for minimum wage, overtime, and meal and rest periods, among others. The ABC test, which has long existed in other parts of the country in different forms, has not previously been used in California.
The decision will have a significant impact on California companies in industries, including construction, where the use of independent contractors is common and long-standing. Specifically, the decision will make it more difficult for companies to use independent contractors to perform services. It might also signal similar changes in other states.
What Is the ABC Test?
Under the ABC test adopted by the court, which is based upon , a worker is properly considered an independent contractor only if the company hiring the worker establishes all of the following: (A) the worker is free from the control and direction of the hiring company âin connection with the performance of the work, both under the contract for the performance of the work and in factâ; (B) âthe worker performs work that is outside the usual course of the hiring companyâs businessâ; and (C) the worker is âcustomarily engaged in an independently established trade, occupation, or business of the same natureâ as the work performed for the hiring entity. The companyâs âfailure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of the wage order,â the court stated.
What Is the Borello Standard?
In adopting the new standard, the court abandoned the Borello testâa multifactor test based primarily upon a companyâs âright to controlâ the workerâin certain circumstances. In particular, the court stated that the new ABC test applies to determine whether there is an employment relationship under the wage orders. In a footnote, the court refused to address whether the Borello test was still the applicable standard for various obligations under the California Labor Code, including the obligation to reimburse employees and to provide them with workersâ compensation benefits. The decision does not address or change the applicable laws regarding the tax treatment of workers.
The âSuffer or Permit to Workâ Standard
The court also addressed its own decision in Martinez, which involved a controversy over the definition of âemployâ and âemployerâ in a case brought by seasonal workers. The Martinez court had ruled, in 2010, that âthe applicable wage order sets forth three alternative definitions of employment for purposes of the wage order: â(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.ââ While the Dynamex defendant argued that the âsuffer or permit to workâ standard only applies to the joint-employment issue presented in Martinez, the court concluded that this standard also âproperly applies to the question whether a worker should be considered an employee or, instead, an independent contractor.â
The court ruled in favor of a broad interpretation of the wage orderâs definition of âsuffer or permit to workâ in order to âprovide the wage orderâs protection to, all workers who would ordinarily be viewed as working in the hiring business.â At the same time, the court ruled that the suffer or permit to work definition should not encompass âindividual workers, like independent plumbers or electricians, who have traditionally been viewed as genuine independent contractors who are working only in their own independent business.â
â[I]t is appropriate, and most consistent with the history and purpose of the suffer or permit to work standard in Californiaâs wage orders,â the court concluded, âto interpret that standard as: (1) placing the burden on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the wage orderâs coverage; and (2) requiring the hiring entity, in order to meet this burden, to establish each of the three factors embodied in the ABC test.â The court also held that under the suffer or permit to work standard, the class certification order at issue in Dynamex should be upheld.
What Is Californiaâs Test for Independent Contractors After Dynamex?
The decision establishes that the ABC test (which previously was not used by any court or enforcement agency in California, including the Division of Labor Standards Enforcement) now applies to claims brought under the applicable wage orders. Because the various wage orders include provisions related to minimum wage payments, overtime compensation, and meal and rest requirements (among others), the ABC test will apply to those claims in many cases.
Does the ABC Test Apply Retroactively or Prospectively?
The court did not specifically address whether the test applies retroactively or prospectively. The California Employment Law Council has submitted an amicus request for clarification on that issue, which may cause the court to amend its ruling.
Key Takeaways for Employers
Under the ABC test, either the independent contractor satisfies all three criteria and is properly classified, or the independent contractor does not meet one or more of the criteria and is misclassified. Companies that engage independent contractors to perform services in California (or in another state using the ABC test) should evaluate whether they can satisfy this new test.
While the court sought to provide âgreater clarity and consistencyâ by adopting the ABC test, the Dynamex decision, at least in the short run, will cause considerable uncertainty and upheaval. Although the court complained that the Borello test âinvariably requires the consideration and weighing of a significant number of disparate factors on a case-by-case basis,â there are 30 years of California court decisions interpreting and applying that test. In contrast, because the ABC test is new to California, it is unclear exactly how it will be applied. As noted above, there will also be further litigation or rulings to clarify whether the Dynamex decision only applies prospectively, as well as under what circumstances the Borello standard still applies.
If nothing else, the courtâs new test is certain to impact and cause disruption to long-standing relationships between companies and independent contractors in California. While independent contractor misclassification lawsuits were already prevalent in California, the decision is expected to further increase the number of wage claims, lawsuits, and class actions by independent contractors and their attorneys.
Editorâs Note: This article was written by guest authors (a past chairman of the 51ˇçÁ÷ Labor and Employment Law Council), , and of the law firm Ogletree Deakins.