Advisory Notice: CA Supreme Court Decision on Independent Contractors

June 28, 2018

The CA Supreme Court has adopted a landmark new legal standard that will make it more difficult for employers to classify workers as independent contractors instead of employees. The new standard will affect any California business that uses independent contractors.  In a unanimous decision, the Supreme Court adopted an “ABC” test to determine if a worker should be classified as an employee or an independent contractor.  Each worker is presumed to be an employee and the burden is on the hiring entity to show otherwise.  In practice, this means a hiring entity can only prove that a worker qualifies as an independent contractor if all three of the following parameters are satisfied:

A) 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 the work and in fact; and

B) the worker performs work that is outside the usual course of the hiring entity’s business; and

C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed (in other words, that the worker is in business for himself).

The ABC test is simpler to apply than past legal standards but is broader in scope.  This test, or a variation thereof, is already used in a number of states.  Part A of the “ABC” test focuses on traditional standards of direction and control that have long been a part of the employee / contractor legal analysis.  Employees typically are considered to work under the direction and control of the employer, unlike independent contractors.  While many forms of business are accustomed to this direction and control element, it may now be the least critical factor in the analysis.

Parts B and C of the “ABC” test are more specific than past tests applied by California courts.  Part B appears particularly troubling for any business that currently uses independent contractors to deliver or provide core products or services.  The Court offered as an example a bakery that hires cake decorators to work on a regular basis on its custom-designed cakes.  Because the workers are performing part of the hiring entity’s usual business operation, such workers would not satisfy test B and would be classed as employees.  For test C, the Court considered facts such as whether the worker had independently made the decision to go into business and if the worker had taken usual steps to establish and promote that business.  The burden is on the hiring entity to show facts to satisfy this test.

In light of this new California ruling, called the “Dynamex Decision”, we strongly advise you seek legal counsel to discuss your hiring practices and the potential impact this decision may have on your business in all jurisdictions.  It is important to note, however, that this ruling currently only applies to wage orders, which explain and provide the rules for minimum pay, basic working conditions, and meal and rest breaks for specific industries. 

As your risk management advisor, we want to be sure you’re aware of this significant ruling so you can seek the appropriate legal advice.  We are here to help you navigate this ruling, as it pertains to your insurance needs, so please contact your Heffernan team with any questions.

This information is provided for informational and/or educational purposes only.  Heffernan Insurance Brokers is not a legal authority, nor do we intend to provide legal advice herein.