Legal Update: The New ABC’s of Hiring Independent Contractors

September 2018

We are regularly called upon by our clients to review employment agreements and independent contractor agreements. In so doing, we must evaluate whether the subject of the contract is being properly classified as one or the other. Misclassification is very common, and the fact that both the worker and the employer wish to classify the worker as an independent contractor is not controlling. Ultimately, it is a question of law. Workers who accept, or even request independent contractor status when they are hired may challenge that status if they are terminated from their jobs.

Classification of workers has traditionally been a challenging and expensive area of exposure for California businesses. Misclassified employees can file claims with the Labor Commissioner, or in court, including collective actions under the Private Attorney General Act. Even minimal violations can bring with them penalties, interest, and the requirement that the business pay the workers attorneys’ fees. The Labor Code also provides for criminal liability for misclassification.

In April of this year, the Supreme Court of California adopted a simple test for determining independent contractor status and rejected an earlier Supreme Court decision in setting out the standards for analyzing independent contractor status. The decision of the Court in Dynamex Operations West v. Superior Court, 4 Cal. 4th 903 (2018) significantly restricts the availability of the classification of independent contractor. The new test, known as the “ABC” test, creates the presumption that a worker is an employee unless all three of the following conditions are met:

A)   The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
B)   The service is performed outside the usual course of the business of the employer; and
C)   The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

The real change is the emphasis on “service performed outside the usual course of the business of the employer”. The Court gives little guidance on this. According to the Court, while a plumber called in to fix a toilet at a retail store is likely an independent contractor, a “work-at-home seamstress” who makes dresses from patterns supplied by a company that engages her services is more like an employee than an independent contractor.

It is more difficult than ever for California employers to sustain a classification of a worker as an independent contractor. In drafting employment agreements or independent contractor agreements, your business should exercise a high degree of care and fully consider the impact of the Dynamex decision.

Want to know more? Contact Wendy Tice-Wallner at 415-733-3976 or email her at wtice-wallner@nullsideman.com.