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BUSINESSES BEWARE: Your Independent Contractors may no Longer be Independent Contractors

May 10, 2018

 

 

If your business utilizes independent contractors, you need to be aware of these recent changes in California law that may affect your workers’ rights and your business’s legal obligations and contact one of our Santa Monica business attorneys today.

 

On April 30, the California Supreme Court issued its long-awaited decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles. In doing so, the Court announced a significant departure from the S.G. Borello & Sons, Inc. v. Department of Industrial Relations test, previously used by California courts and state agencies for the previous three decades for determining whether a worker is an employee or independent contractor under the California Industrial Welfare Commission (“IWC”) wage orders. In its place, the Court adopted the “ABC” test for determining whether an individual is considered an employee under the wage orders, which govern many aspects of wages and working conditions in covered industries. 

 

The Court’s unanimous decision will impact several industries, including the gig economy, the trucking and logistics industry, and other industries where the use of independent contractors is common and long-standing. Specifically, the decision will make it more difficult for companies in some industries to use independent contractors to perform services.

 

Background

 

Up until the Court’s April 30th decision, determining whether workers qualified as an independent contractor required an evaluation under the Borello test, which evaluated a number of factors. Not all of the factors had to be met for a worker to qualify for independent contractor status. The principal factor of the Borello test was whether the “person to whom service is rendered has the right to control the manner and means of accomplishing the result desired” (emphasis added). The test also included nine additional factors:

  1. right to discharge at will, without cause; 

  2. whether the one performing the services is engaged in a distinct occupation or business; 

  3. the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; 

  4. the skill required in the particular occupation; 

  5. whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; 

  6. the length of time for which the services are to be performed; 

  7. the method of payment, whether by the time or by the job; 

  8. whether or not the work is part of the regular business of the principal; and 

  9. whether or not the parties believe they are creating a relationship of employer-employee.

 

Borello, 48 Cal. 3d at 351.

 

The Dynamex decision held that the ABC test — not the Borello test — will govern a worker’s classification under California’s wage orders. The ABC test sets a significantly higher burden on businesses than the Borello test and will make it much more difficult to establish independent contractor status. 

 

Under the ABC test, a worker is presumed to be an employee unless the business establishes the following:

 

(A) the worker is free from the control and direction of the hiring company “in connection with the performance of the work, both under the contract for the performance of the work and in fact”; 

(B) “the worker performs work that is outside the usual course of the hiring company’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 entity. 

 

The Court briefly explained each of these prongs:

  • Prong “A” is similar to the common law test for employment, and evaluates the type and degree of control a business typically exercises over employees.

  • Prong “B” part of the test focuses on whether the individual can reasonably be viewed as working in the hiring company’s business.

  • Prong “C” asks whether the worker independently made the decision to go into business for himself/herself, such as through incorporation, licensure, advertisements, or routinely offering to provide services as an independent business. On this point, the Court held that the fact that a company has not prohibited or prevented a worker from engaging in such a business is not sufficient to establish that the worker has independently made the decision to go into business for himself or herself.

 

The company’s “failure to prove any one of these three prongs 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,” the court stated.

 

Unlike the Borello test (and the independent contractor tests found in other laws), the business’s right to control the worker is not the most important factor in determining whether an employment relationship exists under the ABC test, but only one of three required factors.

 

Although a few other states use the ABC test, California's Supreme Court adopted a stricter version of the test, becoming just the second state (Massachusetts) to do so. In most other states that use the ABC test, part B may be established either by showing that the services are outside the usual scope of the business for which the work is performed or that the work is performed outside of all the places of the company’s business. Like Massachusetts, the California test includes only the first prong of part B — that the work is outside of the usual course of the hiring entity’s business. The Court reasoned that, because many employees work remotely, this stricter part B analysis is more appropriate.

 

Many employers will find it difficult to meet part B because they will need to show that the services performed are not related in any significant way to the company’s business. The examples provided by the Court illustrate the narrow circumstances in which a worker will meet part B. The Court explained that a plumber hired to fix a leak in a retail store performs services that are not part of the store’s usual business. On the other hand, a cake decorator hired by a bakery to work on its custom-designed cakes provides a service — designing cakes — that is in the usual course of the bakery’s business.

 

The ABC test will be particularly troublesome for gig economy businesses that are based on an independent contractor model. Typically, those companies use contractors to perform services that are key to their businesses. For example, a food delivery service that retains independent contractors to deliver food that customers order via an app will now have to show (in claims under the California wage orders) that delivering food is outside their usual course of business, a burden that may be impossible to meet. As a spokesperson for the National Employment Law Project opined, “most on-demand companies will fail the ABC test” and “most workers will win.”

 

Following the Court’s decision in Dynamex, California businesses should evaluate their independent contractor relationships to assess whether those relationships meet each factor of the ABC test. If all three factors are not satisfied, those companies should either