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EMPLOYEE OR INDEPENDENT CONTRACTOR? – CALIFORNIA ADOPTS MORE RESTRICTIVE “ABC” TEST

Potente, Business Lawyer and Company Formation

Just before the world celebrated May Day, an international day honoring workers, the California Supreme Court changed how independent contractors are classified under state law. This law may affect many industries that routinely rely on the independent contractor classification for its workers.

In deciding Dynamex Operations West, Inc. v. Superior Courtthe Court adopted the “ABC” test. Under this new standard, the court will presume that all workers are employees, leaving it up to the hiring entity to prove otherwise. In order to prove that a worker is an independent contractor and not an employee, the hiring entity must prove all of the following:

(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 such work and in fact;

(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 for the hiring entity

Prong A

The standard has not changed much with respect to the first prong. Under the first prong, if a worker is subject to the amount of control that the business typically exercises over an employee, then that worker should be treated as an employee as well. As before, the more control being exercised by the employer will weigh in favor of an employee classification, rather than an independent contractor classification.

Prong B

Under the second prong, if a worker performs duties that are comparable to the duties typically performed by the employees of the business, then that will weigh in favor of an employee relationship. This prong greatly expands the scope of workers that would be considered employees and not independent contractors. A worker must be performing work that is unrelated to the usual course of business of the hiring entity in order to satisfy this prong in favor of an independent contractor classification.

Prong C

The third prong is similar to the second; however, instead of looking at the hiring entity and the tasks being performed by the worker, the court will look at the worker and determine if they have taken steps to create his or her own independent business aside from that of the hiring entity. If the worker has started their own business and conducts services as such, then this prong will most likely be satisfied in favor of an independent contractor classification. However, if the hiring entity unilaterally designates the worker as an independent contractor, it is likely a court will find that the worker is an employee.

Conclusion

As we have previously mentioned, whether someone is an employee or an independent contractor can have significant impacts on a company and how it does business. The new classification system puts the burden on the company to prove its independent contractor classifications, and the new ABC test is more rigorous than the previous factors used to determine proper classification.

In light of the California Supreme Court adopting the ABC test, it is a good idea for companies to go back and reevaluate where they stand regarding worker classification to ensure that they are in full compliance with the law.

By Preston L. Ryan, Esq.

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