California Supreme Court Narrows Independent Contractor Classification

Employment Law  

May 3, 2018

On Monday, in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County, the California Supreme Court adopted a legal test that may make it far more difficult for employers to classify workers as independent contractors. The decision foreshadows a dramatic transformation of the requirements governing what is typically known as the “gig economy”: Uber, GrubHub, and other consumer service providers who rely heavily upon independent contractors to avoid the costs of complying with the labor regulations, taxes, and insurance mandates which accompany employee classification in California.

The Dynamex Court set aside the multifactor test used in previous cases to distinguish independent contractors from employees. That test assessed, among other things, whether the worker at issue could be terminated “at will, without cause,” and whether the employer or the worker supplied “the instrumentalities, tools, and the place of work.”

Instead, the Dynamex Court articulated an alternate “ABC test,” a test that sets a high bar for employers seeking to demonstrate that their workers are independent contractors. This test presumes that an employer’s workers count as employees unless the workers are “free from the control and direction of the hirer, in connection with the performance of the work”; “perform work that is outside the usual course of the hiring entity’s business”; and are “customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.” Only if an employer meets all three of these criteria can the presumption be overcome and the employer’s workers be classified as independent contractors.

The decision in Dynamex may have a wide-reaching impact on employers in this state. Businesses large and small increasingly have turned to independent contractors to stay flexible, cut costs, and evade regulatory burdens. For most of the past decade, temporary and contract employment has grown much faster than non-farm employment. A shift toward a narrower definition of independent contractors could create even more room for workers to sue employers seeking reclassification—such suits are already commonplace—and could force businesses to restructure their services to mitigate the risk of costly litigation.

If you are utilizing independent contractors in your business, you should confer with counsel and assess whether any of your independent contractors should be reclassified in light of this recent decision.