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Employee or contractor? Court watchers get whiplash

In March, we wrote about a new federal case interpreting California employment law on the question of whether a worker should be classified as an employee or an independent contractor. As we described, in that case about a Grubhub driver, the court found that under California's Borello test, Lawson, a driver who delivered food to Grubhub customers, was an independent contractor largely because Grubhub did not have the degree of control over his work that an employer would have.

In that post, we linked to an article that quotes Lawson's lawyer as saying she was surprised that the federal court decided the case under the Borello test because the California Supreme Court was about to decide a case called Dynamex in which the court might adopt a more restrictive test further limiting who is properly classified as an independent contractor.

ABC test

That observation was correct. On April 30, the California Supreme Court issued a unanimous opinion in Dynamex Operations West, Inc. v. Superior Court, rejecting the 30-year old Borello test, which considered numerous factors to determine whether a worker qualifies as an independent contractor, and instead adopting a simplified "ABC" test. Under the ABC test, a worker who has been "suffered or permitted to work" will be presumed to be an employee for Wage Order purposes, unless the employer can overcome this presumption by showing each of the following:

  • (A) 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 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.

Not only does this new test lean more heavily toward classifying workers as employees, many legal commentators speculate that ABC could threaten the emerging "gig economy."

Gig economy

The gig economy refers to the trend toward people working as freelancers or under contractual arrangements with businesses and other employers, instead of as traditional employees - think Lyft and Uber drivers, who operate independently and not as employees.

The importance of proper employee classification

Why is it important? California employers must abide by state and federal wage-and-hour laws (regarding minimum wage, maximum hours, leave rights and other protections) and other laws (federal social security and payroll taxes, unemployment insurance taxes and state employment taxes, workers' compensation insurance and more) that largely benefit employees. If an employer calls a worker an independent contractor, it does not have to comply with these laws vis-à-vis that worker - which could be better for a company's bottom line, so long as the worker is not misclassified as an independent contractor.

The potential liability to companies for improperly misclassifying workers as independent contractors instead of employees can be costly in the long run - such could result in significant tax penalties, as well as exposure to claims for failure to properly pay minimum and overtime wages and/or provide meal periods or rest breaks, etc.

Prudent businesses will re-evaluate all workers classified as independent contractors to determine whether they truly meet the now stricter criteria of California's new ABC test.

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