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A California court has narrowed the definition of Independent Contractors. In a recent decision by the Superior Court of Los Angeles, the court ruled that Dynamex Operations West, Inc. had improperly classified workers as Independent Contractors and created the ABC Test.

Dynamex provides courier services. The class action suit was filed by delivery drivers who alleged various wage and hour violations including failure to pay overtime. The court moved away from the long standing test established by S.G. Borello & Sons, Inc. v. Department of Industrial Relations (referred to as the Borello Test), and adopted the ABC Test.

The court’s decision states that the ABC Test “presumes a worker hired by an entity is an employee and places the burden on the hirer to establish that the worker is an independent contractor” by demonstrating:

(a) that the worker is free from control and direction over performance of the work, both under the contract and in fact;

(b) that the work provided is outside the usual course of the business for which the operates; and 

(c) that the worker is customarily engaged in an independently established trade, occupation or business.

The Test makes clear that ALL THREE elements must be met, and the court may evaluate each criterion in any order it wishes.

For example: Smith & Company assembles eye glasses. They hire an independent contractor to procure and implement a new phone system. This individual has incorporated his business and he regularly performs the same work for other organizations who also employ him as an Independent Contractor. The Independent Contractor in this example may likely pass the ABC Test as the work he performs is completely unrelated to Smith & Company’s regular course of business (criteria B), and because he is customarily engaged in providing this service for other organizations (criteria C). But he must also be free to control the work product (criteria A) in order to meet the ABC Test.

The same company also hires an assembler to assemble glasses for them on a temporary basis during a peek season. This individual works from home. He is free to set his hours and the company agrees to pay him per eye glass assembled. The individual works full time at another company as an Accountant. In this example, the individual would not meet the ABC Test as he fails to meet criteria A due to the fact he is performing the same work as others who are employees (working from home is irrelevant); and he fails to meet criteria C as he does not do this work for others. While it could be argued that he does meet criteria A because he is free to control when he performs the work, the hirer MUST be able to demonstrate that ALL three elements are met.

Take-Aways: 

  1. Think twice about reclassifying employees as independent contractors.
  2. Evaluate who is currently being paid as an independent contractor, do they meet ALL THREE elements? Play devil’s advocate with yourself on this exercise (the burden is on the employer).
  3. Engage legal counsel to review your independent contractor agreements and weigh in on who you are treating as an independent contractor.
  4. Bear in mind this case addresses violations of California’s Wage Orders, there are other factors to keep in mind when classifying independent contractors – IRS regulations, Workers Compensation coverage requirements, employee expense reimbursements, EDD and Unemployment eligibly, and so on. Each regulatory body can (and unfortunately often does) make their own determination on classifications.

As always TPPS is here to help keep you on track with all your HR, Payroll, Labor Compliance and Staffing Needs! Need help, Just Ask Us!