In Dynamex Operations West, Inc. v. Superior Court of Los Angeles, (2018) 4 Cal.5th 903, the California Supreme Court adopted the ABC Test for determining whether certain workers should be classified as independent contractors. The ABC Test, which was codified by the state legislature in 2019, is an employee-friendly test that presumes a worker is an "employee" by shifting the burden of proof onto the employer/company.
Under the ABC Test, companies need to affirmatively show all three of the following factors with respect to their independent contractors:
- They are free from the control and direction of the company in the performance of the work, both under the contract for the performance of the work and on the facts; and
- They perform work outside the usual course of the company's business; and
- They customarily engage in an independently established trade, occupation, or business of the same nature as the work performed.
While the ABC Test does pose a bigger hurdle for companies that want to use independent contractors, it is not insurmountable. Here are some key tips for using correctly classified independent contractors:
- Review all existing independent contractor relationship
agreements for compliance with the ABC Test. The ABC Test
is harder for companies to prove and the penalties for improperly
classifying workers can be significant, including wage and hour
penalties (overtime pay, back wages, meal/rest period recovery,
etc.); workers' compensation penalties; tax and
benefits-related penalties; penalties for willful violations; and
injunctive relief.
- Don't rely solely on a written agreement to
establish a worker's employment status. While written
independent contractor agreements are critical to formalizing this
type of work, these agreements alone are insufficient
evidence for a company when its independent contractor
classifications are challenged. A company cannot
change a worker's status from employee to independent
contractor by simply executing a written agreement to that effect
or by providing the worker with an IRS Form 1099 instead of a
W-2.
- Limit the scope of the independent contractor agreement
to a specific project. If the independent contractor is
going to perform work on multiple projects, it is best to outline
each project in separate agreements. Single agreements covering
various projects tend to suggest the independent contractor is
acting as an employee. Take time to describe the nature and scope
of each project by drafting separate, written agreements.
Continuously reassess the working relationship with the independent
contractor, especially before beginning any new project, making
sure that any new work still complies with the ABC Test.
- Train other employees who monitor and/or work with your
independent contractors. Independent contractors must be
free from control over the manner and means of their work. Because
freedom from control is a key distinction between employees and
independent contractors under the ABC Test, a company should train
its employees to exercise minimal control, if any, over how an
independent contractor chooses to perform their work. For example,
the hiring entity may dictate a timeline or due date for the
project, but it should not specify how the work is to be performed.
It is important to keep other employees informed about the nature
of the company's relationship with independent contractors, so
they too remember to avoid this pitfall.
- Do not treat an independent contractor as an employee. While it may sound obvious, this is a common pitfall. For example, an independent contractor should be excluded from employee-specific meetings, such as employee trainings or meetings about employee benefits. Similarly, the contractor should not be supervised, should not be attending company events and functions, and should not be subject to discipline/performance reviews or other policies as outlined in the employee handbook.
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.