Know the ABC’s for Independent Contractors

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Posted by: By Kapusta, J.D. on Thursday, May 3, 2018 at 12:00:00 am

The California Supreme Court has found that a hiring entity, in order to prove that an independent contractor is not an employee, must establish each of the three factors embodied in the ABC test  — namely, that the worker:

A.    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.    Performs work that is outside the usual course of the hiring entity’s business; and

C.    Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Legal Background. Under both California and federal law, whether an individual should properly be classified as an employee or an independent contractor has considerable significance for workers, businesses, and the public.

Further, the IWC wage orders “suffer or permit to work” definition must be interpreted broadly to treat as “employees,” and thereby provide the wage order’s protection to, all workers who would ordinarily be viewed as working in the hiring business, said the court. The suffer or permit to work definition “is a term of art that cannot be interpreted literally in a manner that would encompass within the employee category the type of individual workers, like independent plumbers or electricians, who have traditionally been viewed as genuine independent contractors who are working only in their own independent business” (Dynamex Operations West, Inc., April 30, 2018, Cantil-Sakauye, T.).

Underlying lawsuit. In the underlying lawsuit, two individual delivery drivers suing on their own behalf and on behalf of a class of allegedly similarly situated drivers filed a complaint against Dynamex, a nationwide package and document delivery company, alleging it misclassified its delivery drivers as independent contractors. This alleged misclassification, they claimed, led to Dynamex’s violation of the provisions of Industrial Welfare Commission wage order No. 9, the applicable wage order governing the transportation industry, as well as various sections of the Labor Code, and as a result, Dynamex had engaged in unfair and unlawful business practices under Business and Professions Code section 17200.

ABC test. A multifactor standard that calls for consideration of all potentially relevant factual distinctions in different employment arrangements on a case-by-case, totality-of-the-circumstances basis has several disadvantages, including that it makes it difficult for both hiring businesses and workers to determine in advance how a particular category of workers will be classified, said the court. Noting that a number of jurisdictions have adopted a simpler, more structured test for distinguishing between employees and independent contractors—the so-called “ABC” test—the court observed that this minimizes the disadvantages.

Accordingly, the court found it appropriate and consistent with the history and purpose of the suffer or permit to work standard to interpret that standard as: (1) placing the burden on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the wage order’s coverage; and (2) requiring the hiring entity, in order to meet this burden, to establish each of the three factors embodied in the ABC test, as outlined above.

Burden on hiring entity. After discussing each part of the ABC test and its relationship to the suffer or permit to work definition, the court concluded that unless the hiring entity establishes each part of the ABC test it set forth, the worker should be considered an employee and the hiring business an employer under the suffer or permit to work standard in wage orders. The hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of the wage order.

The case is No. S222732.

CEA is here to help – if you hire or currently engage independent contractors an immediate review of their status is necessary. Proper classification of independent contractors can save your organization significant liability moving forward.

By Kapusta, J.D. (Article edited, full version available to CEA members.)

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