New Legal Requirements for Legal Contractors

30 Year Old Test Abandoned!  Classifying Workers as Independent Contractors in California Becomes More Difficult

On April 30, 2018, the California Supreme Court issued a milestone ruling in the matter of Dynamex Operations West, Inc. v. Superior Court, forcing many companies to think twice about classifying their workers as independent contractors rather than employees.  A previous 30-year old standard, heavily relied upon by companies operating in California, was abandoned in favor of a new test coined by the Supreme Court as the “ABC Test” – and in the process greatly expanded the definition of “employee” under California law.

The company involved in the abovementioned case is Dynamex, a courier company that offers nationwide same-day logistics and transportation services to businesses and the public.  In 2004, Dynamex decided to reclassify all of its California drivers as independent contractors rather than employees.  Six years later, a class action lawsuit was filed challenging that decision.  In response, Dynamex argued that their drivers had significant control over their own working conditions by setting their own hours and driving for multiple companies, and therefore met the definition of “independent contractor.”

The Court disagreed and stated that all workers in California are presumed to be employees.  As such, all workers are to be treated as employees unless the “hiring company” can establish all three factors of the new ABC Test:

  1. That the worker is free from the control and direction of the hiring company in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. That the worker performs work that is outside the usual course of the hiring company’s business; and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

All of these requirements must be met in order for the presumption to be overcome.  As a result, many businesses will now likely bear the responsibility of paying and complying with social security, workers compensation, unemployment insurance, employment taxes and a host of other dizzying state and federal statutes that apply to “employees.”  Undoubtedly, companies will see an increase in workers challenging any classification as “independent contractor.”

TIP: Employers operating in California that treat workers as independent contractors are encouraged to consult their legal counsel to ensure they meet the requirements of the new ABC Test.

Background – Business

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