Dynamex Operations West, Inc. v. Superior Court (Lee)
The California Supreme Court narrowed the definition of what it means to be an independent contractor in a decision published in May 2018: Dynamex Operations West, Inc. v. Superior Court (Lee). The decision replaces the longstanding Borello standard with an “ABC” test. It will have a huge impact on companies who have hired workers as independent contractors who perform services that form the core of a company’s business model (e.g., a driver working for a transportation company). These workers will now likely be determined by California’s courts to be employees, entitled to all of the protections of the Industrial Welfare Commissions (“IWC”) wage orders (minimum wages, overtime, paystubs, expense reimbursements, etc.).
Under the ABC test: “[A] worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both both under the contract for the performance of such 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 for the hiring entity.”
Prong B of the ABC test is where its power lies. Prong B precludes businesses from using independent contractors to deliver or provide their core product or service. Under Borello, the longstanding prior standard, many companies and industries built the use of independent contractors into the core of their business models (think Uber or Lyft). Those companies and industries now face serious legal challenges to their business model.
As a result of the decision, companies should review any workers classified as independent contractors to ensure compliance with the new standard. In addition, those classified as independent contractors should ensure that they are still properly classified and, if not, that they are being properly compensated under the IWC’s wage orders.