United States: The ABCs Of The Employment Relationship: California's High Court Adopts New Independent Contractor Test

In a landmark decision, the Supreme Court of California adopted a new test to determine whether a worker performing services for a company is an employee or an independent contractor under California's wage orders. The new three-factor test, known as the ABC test, will determine whether a company "employs" a worker under the wage orders, which address certain requirements for minimum wage, overtime, and meal and rest periods, among others. The ABC test, which has long existed in other parts of the country in different forms, has not previously been used in California.

The unanimous decision will likely 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.

What Is the ABC Test?

Under the ABC test adopted by the court, which is based upon Massachusetts's version of the test, a worker is properly considered an independent contractor only if the company hiring the worker establishes all of 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 company's "failure to prove any one of these three prerequisites 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.

What Is the Borello Standard? 

In adopting the new standard, the court abandoned the Borello test—a multifactor test based primarily upon a company's "right to control"  the worker—in certain circumstances. In particular, the court stated that the new ABC test applies to determine whether there is an employment relationship under the wage orders. In a footnote, the court refused to address whether the Borello test was still the applicable standard for various obligations under the California Labor Code, including the obligation to reimburse employees and to provide them with workers' compensation benefits. The decision does not address or change the applicable laws regarding the tax treatment of workers.

The "Suffer or Permit to Work" Standard

The court also addressed its own decision in Martinez, which involved a controversy over the definition of "employ" and "employer" in a case brought by seasonal workers. The Martinez court had ruled, in 2010, that "the applicable wage order sets forth three alternative definitions of employment for purposes of the wage order: '(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.'" While the Dynamex defendant argued that the "suffer or permit to work" standard only applies to the joint-employment issue presented in Martinez, the supreme court concluded that this standard also "properly applies to the question whether a worker should be considered an employee or, instead, an independent contractor."

The court argued in favor of a broad interpretation of the wage order's definition of "suffer or permit to work" in order to "provide the wage order's protection to, all workers who would ordinarily be viewed as working in the hiring business." At the same time, the court ruled that the suffer or permit to work definition should not encompass "individual workers, like independent plumbers or electricians, who have traditionally been viewed as genuine independent contractors who are working only in their own independent business."

"[I]t is appropriate, and most consistent with the history and purpose of the suffer or permit to work standard in California's wage orders," the court concluded "to interpret that standard as: (1) placing the burden on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the wage order's coverage; and (2) requiring the hiring entity, in order to meet this burden, to establish each of the three factors embodied in the ABC test." The court also held that under the suffer or permit to work standard, the class certification order at issue in Dynamex should be upheld.

What Is California's Test for Independent Contractors After Dynamex?

The decision establishes that the ABC test (which previously was not used by any court or enforcement agency in California, including the Division of Labor Standards Enforcement) now applies to claims brought under the applicable wage orders. Because the various wage orders include provisions related to minimum wage payments, overtime compensation, and meal and rest requirements (among others), the ABC test will apply to those claims in many cases. 

Does the ABC Test Apply Retroactively or Prospectively?

The supreme court did not specifically address whether the test applies retroactively or prospectively. The California Employment Law Council has submitted an amicus request for clarification on that issue, which may cause the court to amend its ruling.

Key Takeaways for Employers

Under the ABC test, either the independent contractor satisfies all three criteria and is properly classified or the independent contractor does not meet one or more of the criteria and is misclassified. Companies that engage independent contractors to perform services should evaluate whether they can satisfy this new test.

While the supreme court sought to provide "greater clarity and consistency" by adopting the ABC test, in the short run the Dynamex decision will cause considerable uncertainty and upheaval. Although the supreme court complained that the Borello test "invariably requires the consideration and weighing of a significant number of disparate factors on a case-by-case basis," there are 30 years of California court decisions interpreting and applying that test. In contrast, because the ABC test is new to California, it is unclear exactly how it will be applied. As noted above, there will also be further litigation or rulings to clarify whether the Dynamex decision only applies prospectively, as well as under what circumstances the Borello standard still applies. 

If nothing else, the court's new test is certain to impact and cause disruption to long-standing relationships between companies and independent contractors in California. While independent contractor misclassification lawsuits were already prevalent in California, the decision is expected to further increase the number of wage claims, lawsuits, and class actions by independent contractors and their attorneys.

For an in-depth look at how the ABC test may impact California companies and employers across numerous industries, join us for our upcoming webinar, " The ABCs of Employment: What California's New Independent Contractor Test Means for Companies and Employers," featuring Robert R. Roginson (Shareholder, Los Angeles) on May 22, 2018, at 11:00 a.m. Pacific. To register for this timely program, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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