Independent Contractor? California Supreme Court Adopts ABC Test

A landmark decision issued by the California Supreme Court on April 30, 2018 will have far-reaching implications for any California businesses that use contract workers, across all industries and especially those in the "gig" economy, like Uber and Lyft.

The unanimous decision, in a case brought by drivers working for a delivery company, Dynamex Operations West, Inc. v. Superior Court, puts in place a three-part test to determine who can be classified as an independent contractor.

This decision expands the definition of "employee" for purposes of the wage orders used by California's Industrial Welfare Commission (IWC) and imposes an affirmative burden on companies to prove that workers are properly classified as independent contractors. The Court held that there is a presumtion that workers are employees.

As a result of this decision, the Court adopted a new standard for determining whether a worker is "employed" by a business. The new "ABC" test mandates that a worker IS an employee unless the business meets all three of the following criteria:

A - That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
B - That the worker performs work that is outside the usual course of the hiring entity's business.
C - That 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.

It is unclear how California's courts and its Department of Industrial Relations will apply the new test, and specifically, the critical question posed by Part B: When is a worker performing work that is outside, versus within, the entity's business? Many businesses in the so-called gig economy are uniquely at risk with respect to this inquiry.

However, given the significance of this decision, entities doing business in California should immediately and carefully re-examine their contractor classifications to ensure compliance with the new rules.

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