With the rapid rise of so called “gig” workers nowadays, many employers need to make the distinction between an employee and an indpendant contractor. While making this distinction would seem straightforward, this has traditionally been a point of uncertainty for many businesses. Now, as the result of a landmark court case, and a new three-pronged test, there is more clarity to this issue.

In April of 2018, the California Supreme Court ruled that the ABC test should be used to determine whether a worker is an independent contractor or an employee and therefore covered under the state’s Wage Orders. The Wage Orders address minimum wage, overtime, meal and rest breaks, and related issues across various industries and cover employees, but not bona fide independent contractors.

A trucking and transportation case that will affect most industries

In Dynamex Operations West, Inc. v. Superior Court, an employer had reclassified delivery drivers from employees to independent contractors in 2004. Two delivery drivers later sued, alleging the employer misclassified them as independent contractors and that the decision led to violations of California’s Wage Order No. 9 in addition to other violations.

The employer and delivery drivers disagreed about which test should be used to determine whether they were employees or independent contractors. The employer argued that the court should use a multifactor test under which no single factor is determinative and the unique circumstances of each case is weighed and balanced. The delivery drivers argued that the ABC test should be used, which is generally a more difficult test to satisfy since all three factors must be met.

The California Supreme Court ultimately ruled that the ABC test should be used for determining whether a worker is an employee or independent contractor for the purposes of the state’s Wage Orders.

Unraveling the ABC Test

Under the ABC test, a worker is considered an independent contractor if all three of the following factors are met:

  1. Free from control and direction
    Similar to the previously used common law test, if it is found that a worker who is, either by contract or by practice, subject to the type and degree of control a business typically exercises over employees then this prong is not satisfied.;

  2. Outside of the usual course of business
    If the worker engages in work that is in the same business as the hiring company, and therefore providing services to the business in a role comparable to that of an employee they should be considered as working as an employee;

  3. Customarily engaged in independent trade
    This last prong attempts to identify those workers that have taken steps to create their own business not associated with the hiring company. If workers have independently made the decision to go into business for themselves, they are likely to be found as satisfying this third prong.

In addition to adopting this test, the Court ruled that the hiring entity has the burden of establishing that the worker is an independent contractor who was not intended to be covered by the Wage Order. The hiring entity must show that all three factors of the ABC test are met.

Compliance Recommendations:

For purposes of determining coverage under the state’s Wage Orders, California employers should apply the ABC test. If the worker fails to satisfy one or more parts of the test, they must be treated as an employee (entitled to minimum wage, meal and rest breaks, and other protections). Employers who work with independent contractors may want to consult legal counsel as well their qualified tax professional to review those classifications and to address reclassifications if necessary.