California Supreme Court Issues New, More Restrictive Independent Contractor Test

The California Supreme Court has adopted a new test for determining whether a worker is an employee or an independent contractor for purposes of California wage orders. The ruling will have a significant impact on California workplaces, as it will be more difficult for businesses to classify workers as independent contractors.

The question of whether someone qualifies as an independent contractor has always involved a complex and fact-specific analysis. The test also varies depending on which law is at issue; different tests are used for tax, workers’ compensation, and unemployment purposes, for example.

In Dynamex Operations W., Inc. v. Super. Ct., No. S222732 (Cal. Apr. 30, 2018), the California Supreme Court had to decide the proper test for purposes of California wage orders—such as those governing minimum wage, overtime, and meal and rest breaks. The court rejected the long-standing Borello test, a flexible multi-factor test that examined the relationship between the company and the worker, including whether the company had the right to control how the work was performed.

Instead, the court adopted a more rigid, three-prong “ABC” test and shifted the burden of proof to the employer. To treat a worker as an independent contractor, a company must now show that all of the following are true:

• The worker is free from the control and direction of the company in connection with performing the work, both in reality and under the terms of the relevant contract.
• The worker performs work that is outside the usual course of the company’s business.
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work being performed for the company.

The second prong in particular might make it difficult for employers to classify workers as independent contractors. People who are performing work directly related to the company’s products or services are unlikely to meet this requirement. As examples of workers performing work in the usual course of the company’s business, the Dynamex court cited a bakery hiring cake decorators or a clothing manufacturer hiring off-site seamstresses.

For now, the ABC test is applied only in the context of California wage orders. The court did not decide the issue of whether the ABC test would apply more broadly to other obligations under the California Labor Code, such as reimbursement of business expenses.