New Test For Employee Vs. Independent Contractors In California

Business owners need to be aware of a recent landmark decision in California employment law. The California Supreme Court decision, Dynamex Operations West, Inc. v. Superior Court, changes the nearly 30-year-old test for whether a worker is classified as an employee or an independent contractor.  The two main takeaways are that (1) it will be more difficult for business owners to classify workers as independent contractors, and (2) because the decision represents an immediate change to the law, many business owners may suddenly be in violation of the law, potentially exposing them to significant legal repercussions.

For business owners, the practical distinction between whether a worker is classified as an independent contractor or as an employee is that independent contractors are less expensive. Specifically, when it comes to independent contractors, business owners need not make payroll tax contributions, need not pay unemployment insurance premiums, and need not pay workers’ compensation premiums. In addition, independent contractors are not owed minimum wage, are not entitled to rest and meal breaks, and do not receive reimbursements for work-related expenses.

If a court determines that a worker was misclassified as an independent contractor and should have instead been classified as an employee, the consequences for the business owner can be severe. Business owners may have to repay wages, expenses, taxes, and insurance premiums. On top of all that, business owners need to pay penalties, remit back-taxes, pay their own legal fees, and often must pay the legal fees of the worker(s) who brought the claim against them.

Since 1989, the main test in California for whether a worker was classified as an independent contractor was the multi-factor balancing test set forth in the S.G. Borello & Sons, Inc. v. Department of Industrial Relations (“Borello”) case. Because the Borello test required balancing many different factors, and did not include strict instructions for how those factors should be weighed, there was more room for business owners to argue they were properly classifying workers as independent contractors.

The new test, however, makes it much more difficult for business owners to prevail in misclassification lawsuits.  Now, business owners must establish all of the following prongs in order for a worker to be properly classified as an independent contractor:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, 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.

Although the Court limited the applicability of the new test to wage issues, the impact is still expected to be far-reaching.  The new test threatens to increase what was already a heightened pace of misclassification lawsuits against companies. Business owners with any questions or concerns about the classification of workers in their workforce should consult an attorney to evaluate options minimizing any exposure they may face as a result of the Dynamex test.

For more information about the new test and its implications, contact Patrick Klingborg in LGC’s San Diego office.