By Tammy Binford, Contributing Editor

The California Supreme Court’s ruling in a case exploring how workers should be classified—either as independent contractors or as employees—means California businesses will have a tougher time justifying independent contractor classifications.

The court ruled on April 30 in the appeal of Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County. Dynamex, a package and document delivery company, had classified drivers as contractors instead of employees, meaning the company was relieved of its obligations under California Industrial Welfare Commission wage orders related to the wages, hours, and other working conditions of the drivers.

The court’s ruling significantly toughens the test used to determine whether a worker can be classified as a contractor. The change is expected to have a big impact on gig economy workers.

“The big takeaway is that even if you exercise no control over a worker, and even if that worker has other clients in an independent business, [she is] still an employee if [she] perform[s] work that is part of your usual business,” says Mark Schickman, the editor of California Employment Law Letter and an attorney with Freeland Cooper & Foreman LLP in San Francisco. “I don’t see how driving businesses like Uber or Lyft could designate a driver as anything but an employee.”

Schickman says other businesses also will be affected, such as retail stores hiring gig workers to sell merchandise and law and accountancy firms that hire independent contract lawyers and accountants. “Independent contract arrangements were always tough to justify and now it is even tougher,” he says.

ABC Test

Todd R. Wulffson, an attorney in the Irvine office of Carothers DiSante & Freudenberger LLP, explains that the Dynamex ruling is significant for California employers because it adopts the “ABC test” to make the determination. Previously, the state used a multifactor test focusing on the level of control the hiring entity had over the worker’s performance of the work.

The ABC test presumes a worker is an employee unless the hiring entity proves the following:

1. 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 the work and in fact.
2. The worker performs work that is outside the usual course of the hiring entity’s business.
3. 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.

“Under this new test, the majority, if not the vast majority, of current independent contractors should be reclassified as employees—particularly people driving in the gig economy,” Wulffson says, adding that if a California employer has more than a few independent contractors, it should conduct an audit—with the assistance of counsel to keep it privileged—to determine liability.

Misclassifying independent contractors is a common class action issue, Wulffson says, “and those are very expensive, time-consuming, and painful lawsuits that are almost never covered by insurance.”

In its decision, the court noted that the ABC test is used in other jurisdictions to determine worker status, but Wulffson says it isn’t very prevalent, “most likely because it is so strict.” Thus, the ruling will be a blow to both businesses and contractors.

“California, unfortunately, has proven yet again that but for the weather, no one would want to start a business here,” Wulffson says.

Impact Beyond California

Wulffson doesn’t expect the ruling to have a major impact beyond California since most states don’t follow California’s example on employment laws. He points out that California is one of just three states with daily overtime, plus the state “has a panoply of employment regulations and laws found almost nowhere else.”

The independent contractor test used at the federal level also differs from California’s new test. Wulffson says the U.S. Department of Labor (DOL) uses the economic reality test, which looks primarily at seven factors focused on the level of control the hiring entity has over the contractor.

Wulffson says the DOL also has focused on misclassification in recent years because of concern that businesses are wrongfully avoiding payroll taxes. “It has not, however, gone anywhere near the ABC test,” he says.