California Ruling Narrows Independent Contractor Classification

California Ruling Narrows Independent Contractor Classification

SAN FRANCISCO — If your California business is paying workers as independent contractors, there is a new legal test for you. 

In a landmark decision yesterday, the California Supreme Court made it harder for employers to classify workers as independent contractors.

Industry attorney Karen Tynan told XBIZ that with the ruling, “This is a time for companies to manage this risk and make sure that misclassification is not occurring."

"Since most adult companies pay set workers and talent as independent contractors, this is business altering," Tynan said. “Many workers previously classified as independent contractors must now be classified as employees. Further, this decision will likely embolden plaintiff’s attorneys who will take on many misclassification cases knowing that the standard has shifted.”

With the decision, the court embraced a more rigid evaluation than the current, looser standard for determining whether a worker is an employee or a contractor, Tynan said.

“The lawyers for the workers successfully urged the California Supreme Court to embrace a so-called ‘ABC test,’ which is used in New Jersey and Massachusetts.” 

That test requires the employer to establish three factors to show a worker is an independent contractor: “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; that the worker performs work that is outside the usual course of the hiring entity’s business; and 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.”  

“It bears emphasis that in order to establish that a worker is an independent contractor under the ABC standard, the hiring entity is required to establish the existence of each of the three parts of the ABC standard,” the court wrote.

The court offered specific examples of an independent contractor, such as a plumber temporarily hired by a store to repair a leak or an electrician to install a line. A seamstress, however, who works at home to make dresses for a clothing manufacturer from cloth and patterns supplied by the company would be employees.

Yesterday’s decision came in a class-action lawsuit against Dynamex Operations West Inc., a delivery company that counted among its clients. The lawsuit charged that Dynamex misclassified its delivery drivers as independent contractors rather than employees.

The state’s highest court said wage-and-hour laws were adopted to enable people to earn a subsistence standard of living and to protect workers' health and safety.

The court also noted that the laws also protect the public from having to assume financial responsibility for workers earning substandard wages or working in unhealthy or unsafe conditions.

“The ruling did not address other issues, such as payment of work expenses, workers’ compensation and unemployment benefits, which are covered by separate laws,” Tynan said. “However, Kevin Ruf, a lawyer for about 300 Dynamex drivers who will now be allowed to pursue their case as a class action, said the court’s rationale should help workers seeking employee status overall.”