On April 30th, there was a tectonic shift in California that didn’t involve a major fault line.
The California Supreme Court’s heavily-anticipated Dynamex decision resulted in what may become a new legal standard that will be applied, not just to this case, but broadly across the state.
Specifically, the court departed from applying the previous and long-standing judicial test (the Borello Test), which held that deciding whether a worker was an independent contractor (IC) or a misclassified employee of a client company came down to a multi-factored and weighted analysis of the overall direction and control that a client company had over the worker. In other words, there were a lot of ways to defend your classifications. Instead, the court adopted a version of the “ABC Test,” a stringent three-pronged examination that other states, such as Massachusetts and New Jersey, already utilize.
With this momentous news comes lots of questions, but one thing is certain: inaction is not an option.
The Dynamex ruling explained
In Dynamex, the court was asked to determine the appropriate standard for classifying a group of delivery drivers as employees or independent contractors under California’s Industrial Welfare Commission (IWC) Wage Orders. In California, Wage Orders dictate the wage, hour, and working condition requirements for specific industries. The IWC regulates these standards, including proper application of overtime wages, minimum wage, and meal and rest breaks. Employees receive protections under the Wage Orders, ICs do not.
As mentioned, rather than adhering to previous analysis under Borello, the court crafted a modified version of the ABC Test, which severely narrows the ways that a worker could possibly be classified as a true independent contractor. Namely, under ABC, there is a presumption that the worker is an employee, so the burden is on the hiring entity to establish that the worker is an actual independent contractor.
To meet this burden, the hiring entity must establish each of the following three factors:
- That 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; AND
- That the worker performs work that is outside the usual course of the hiring entity’s business (more on this prong); AND
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Failure to satisfy any of these prongs means that the worker is a misclassified employee, bringing along with it a host of fines, penalties, and possible brand damage.
How Prong B impacts California employers
The court’s application of the second prong narrowly allows for it to be satisfied: the only way to satisfy prong B is to prove that the work performed falls outside the usual course of the hiring entity’s business. On its face, should this interpretation be applied across the state and for purposes beyond Wage Orders, paying someone as an IC without proper preparation could be a very risky decision.
The court didn’t exactly help address this risk; one of their examples of satisfying the second prong was an example of plumber being called to provide services to your company. Unless you’re a plumbing company, you probably already suspected that hiring a plumber did not put you in the crosshairs for misclassification. But most real-world examples of using ICs are not that obvious. Say you’re a software company that contracts with an engineer that has a rare and highly-sought after skillset: sure, no one internally can do what this engineer does, but is it outside of the usual course of your business?
What should California employers do in the wake of the Dynamex ruling?
Although it is not yet clear how far reaching the ruling will be in terms of application to other California misclassification proceedings (such as tax and unemployment), it should be expected that this case holding will go beyond the parties in Dynamex. Add to this the fact that California already has onerous laws on its books (SB459, which imposes $5,000 – $25,000 per-violation fines, and requires companies to publicly post misclassification on their websites), companies that don’t have compliance programs need to establish one now. For companies that do have a program, it’s time to dig in on making sure you’re as compliant (on paper and in practice) as you can be. Best practice would be to couple with a third-party specialist, such as a compliance company or outside counsel, so that you can re-examine your independent contractor populations in light of Dynamex and its progeny.
While there are many questions from its ruling that will only play out in future cases, waiting to let the law settle the matter may leave your company at a preventable risk, so act now.