Independent Contractors or Employees: Is the “Gig” Up in California?

In what many are calling a landmark decision last week, the California Supreme Court adopted a new legal standard that will make it much more difficult for businesses to classify workers as independent contractors in California. The decision will likely have wide-ranging ramifications for all businesses that use independent contractors, especially those like Uber, Lyft, Amazon, Instacart, and other companies buoyed by the sweat of the emerging “gig economy.” The case is Dynamex Operations West, Inc. v. Superior Court.

Under the new, much simplified “ABC” test, a worker is determined to be an employee under California’s Wage Orders unless the business can establish each of three ABC factors:

(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.

The decision not only expands the definition of “employee” under California’s Wage Orders, it also imposes an affirmative burden on businesses to defend their classification of workers as independent contractors and prove that such classification is proper.

Misclassifying workers can have a potentially huge impact on businesses, because if a worker should be classified as an employee, the business bears responsibility for paying federal social security and payroll taxes, unemployment insurance taxes, and state employment taxes, as well as providing workers’ compensation insurance. Employees, unlike independent contractors, are protected by an extensive body of laws regulating the workplace, including wage and hour laws like minimum wage and overtime, and discrimination laws, among many, and significant penalties are imposed for misclassifying workers, including the potential for costly tax audits by the EDD.

As a result of the Dynamex decision, all California businesses that utilize independent contractors, and all California workers that are classified as independent contractors, should re-evaluate whether they are properly classified under the ABC test – on both an individual and class basis.

For more information or questions about the information contained in this legal alert, please contact the Johnson Fistel, LLP team.