On April 30, 2018, the California Supreme Court issued a decision on the Dynamex Operations West, Inc. v. Superior Court of Los Angeles case. On that day, the California Supreme Court reinterpreted and rejected the long-standing “Borello” test. Originally, this test determined whether workers should be classified as either employees or independent contractors for the purposes of the wage orders adopted by California’s Industrial Welfare Commission (“IWC”).

This decision was made in order to grant workers greater rights and to encourage a more worker-friendly labor standard. Of note, the court embraced a standard which now automatically presumes all workers are employees instead of independent contractors. Additionally, the burden of proof has now been placed on businesses classifying an individual as an independent contractor of establishing that such classification was proper.

The New “ABC”  Test

This new rule of thumb is now referred to as the “ABC” test. Under this new standard, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the employer proves that:

(A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Consequences of The Ruling

It’s worth noting that each of the requirements must be met in order for the employer to classify a worker as an independent contractor. Additionally, proof of meeting said criteria must be in place for the court to recognize that a worker has been properly classified as an independent contractor. The court framed its decision by characterizing the misclassification of independent contractors as harmful and unfair to workers, competitors, and the public as a whole.

Understandably, this decision has upended the existing independent contractor labor market. Many workers who were originally classified as independent contractors are now, no longer legally able to be classified as such. Whether a worker should be classified as an employee or independent contractor has considerable financial and legal significance for all parties involved. If a worker is classified as an employee, the employer bears the responsibility of paying Social Security and payroll taxes, unemployment insurance taxes and state employment taxes. Additionally, said employer must provide worker’s compensation, and must comply with all related state and federal statutes governing the wages, hours, and working conditions of employees.

Suddenly, a position which cost a company very little to fill, may now cost a considerably larger sum of money. Take the example of real estate agents. Many of these people previously had to work additional full-time positions and carry out real-estate activities on the side. Why? Under classification as an independent contractor, firms like Dickson, Century 21, RE/MAX, Coldwell Banker, and others did not have to offer benefits or insurance of any kind.

Originally, many of these workers were hired as independent contractors by large real estate sales firms specifically to avoid these additional expenses of paying employees per hour worked. However, with the introduction of the “ABC” test, doing such has become much more difficult for them to justify.

Industry Impacts

Naturally, this new ruling extends into almost all industries, including that of real estate. Stipulation B of the “ABC” test is proving troublesome for many businesses that use independent contractors to deliver or provide products and services. On the surface, the test makes it difficult for real estate agents to be deemed independent contractors.

This is due to the fact that the test requires independent contractors to perform work outside the usual scope of the business. Obviously, real estate firms are in the business of marketing and selling property and real estate agents are typically in the business of marketing and selling property. Upon first glance, it appears that the real estate agent’s work falls inside the firm’s standard business description. Quite the conundrum.

Some critics of the decision have argued that real estate agents remain properly classified as independent contractors even after the Dynamex decision. This is due to California Business and Professions Code section 10032. This code specifically authorizes an independent contractor relationship between an agent and a real estate firm. However, this code section was enacted to ensure that there would be liability on the part of the broker for tortious acts of the salesperson, who is an agent of the broker regardless of whether the salesperson is classified as an employee or an independent contractor. Therefore, there is some question as to whether the aftermath of the Dynamex decision applies in the context of wage and hour law.

Many companies across various industries now find it challenging to meet part B because they must show that the services performed are not related in any way to the hiring entity’s business. The court illustrated the narrow circumstances in which a worker will meet this stipulation.

For example, an electrician hired by a pharmacy to repair faulty wiring will still be classified as an independent contractor. On the other hand, a mental health counselor hired by a counseling center to counsel clients will likely fall under the scope of regular business. As a result, mental health practitioners may now qualify as employees. Therefore, they will be taxed as such and their employer will be required to pay related taxes and insurances on said employee.

Ultimately answering whether the worker is performing work within the hiring entities usual course of business can be a complicated question. Take ride share companies like Lyft and Uber for example. Drivers of these ride share companies may argue that Uber and Lyft are in the business of driving people from one location to another, and drivers fall within the scope of their usual course of business. However, Uber and Lyft may argue that they are technology companies, providing cell phone Apps and a platform for users to interact and contract various services on.

Where We Go From Here

Following the California Supreme Court’s decision, it is recommended that all California companies evaluate their independent contractor relationships. It is vital that they assess whether those relationships meet each factor of the “ABC” test or if the workers should now be properly classified as employees.

Naturally, if one or more of the factors cannot be satisfied, that company should explore whether their independent contractor relationships can be modified. If not, they may need to reclassify their independent contractors as legitimate employees.

Are You Seeking Legal Advice?

If you’re an independent contractor in California and you feel you may qualify as an employee under this new ruling, contact the professional team of lawyers at Webb Law Group, APC. Additionally, if you or your company employs independent contractors in your place of business, it is advised that you take the steps to ensure that all stipulations of the “ABC” test have been met.

If you feel you may need legal advice about the independent contractors your company utilizes, Webb Law Group is here to answer any questions you might have. Webb Law Group is a reputable business and employment litigation firm with experience in matters involving California business law. Having a reputable attorney by your side for matters of this nature will offer you the best possible chance of avoiding lawsuits or determining if you have a case against an employer.

If you feel that you need legal representation, we are happy to review your legal needs and provide consultation and support where necessary. For questions, or to schedule a consultation, contact Webb Law Group today at 559-431-4888 (Fresno) or 619-399-7700 (San Diego).