Dynamex Decision

How California’s Supreme Court Is Making It More Difficult for Employers to Classify Workers as Independent Contractors

After the California Supreme Court issued a landmark decision on April 30, 2018 in the matter of Dynamex Operations West, Inc. v. Superior Court of Los Angeles, employers are immediately questioning whether they should reclassify independent contractors or face steep fines for misclassification.

The court adopted a new test for classifying workers that begins with the assumption that all workers are employees instead of contractors . An employer would need to prove that a worker is eligible to be a contractor by following the newly adopted “ABC test”, which will be discussed in further detail below.

Background
Dynamex is a nationwide same-day courier and delivery service that offers on-demand, same-day pickup and delivery services to businesses and the public. Prior to 2004, Dynamex classified its California drivers as employees. Starting in 2004, however, Dynamex converted all of its drivers to independent contractors as a cost savings measure.

The Supreme Court’s Decision
As a threshold matter, the Court framed its decision by broadly characterizing the misclassification of independent contractors as harmful and unfair to workers, honest competitors, and the public as a whole.

The ABC Test
In order for a court to recognize that a worker is classified as an independent contractor, all of the following requirements need to be met:

• (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
• (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
• (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Practical Application
The court offered examples: A plumber temporarily hired by a store to repair a leak or an electrician to install a line would be an independent contractor. But a seamstress who works at home to make dresses for a clothing manufacturer from cloth and patterns supplied by the company, or a cake decorator who works on a regular basis on custom-designed cakes would be an employee because they perform core services for the company.

What This Means for California Businesses
If a worker is classified as an employee, the employer bears the responsibility of paying Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and complying with the endless labyrinth of state and federal statutes governing the wages, hours, and working conditions of employees.

Any businesses operating in California that treats workers as independent contractors should confer with their legal counsel to review the relationship under the “ABC test” and determine whether any or all such workers should be reclassified.

Independent contractors that are outside of California can continue to be classified as contractors.

We are unsure how this will affect businesses like Lyft, Uber, and other app-driven services where they employ only contractors. Stay tuned for more information about this important ruling and consult your employment attorney to get advice on your specific situation.