Employers must learn their ABCs and practice them if they want to avoid legal problems in the wake of a recent California Supreme Court ruling. The test for when a worker can be considered an independent contractor has become a lot stricter.
In their decision regarding Dynamex Operations West Inc. v. Superior Court of Los Angeles, justices adopted a modified “ABC test.” Under the test, for a worker to be considered an independent contractor, the hiring entity must prove:
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 contract for the performance of the work and in fact. (This is similar to the previous test, which required the manner in which workers performed services to be free from the typical control employers impose on employees.)
B — That the worker performs work that is outside the usual course of the hiring entity’s business. (In other words, the worker is not providing services to a business that an employee would provide.)
C — That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed. (This means a worker has made a decision to go into business for himself and has done such things as incorporated, obtained licenses, advertised or otherwise demonstrated the establishment of an independent business offering services to customers.)
The justices modeled their decision after Massachusetts’ independent contractor statute, which is considered one of the nation’s strictest. The ruling applies only to Industrial Welfare Commission Wage Orders. However, its application could expand with future decisions or legislative action.
In the past, California employers were required to meet the Borello test, which provided more flexibility for determining if a worker can be considered an independent contractor. While the Borello test primarily considered the worker’s freedom from the hiring entity’s control, other factors were considered, including the nature of the services performed, the worker’s unique skills, and whether the hiring entity provided the tools and place for work to be performed.
The Dynamex case involved the classification under California’s Industrial Welfare Commission Wage Orders of delivery drivers. These orders cover minimum wage, maximum hours and other work conditions, such as rest breaks.
The case was brought by two drivers in 2005, who claimed Dynamex, a same-day courier and delivery company, misclassified them as independent contractors, rather than employees. The company had classified its drivers as employees until 2004, when it switched to a contractual arrangement and reclassified drivers as independent contractors.
Under the revised arrangement, drivers were required to provide their own vehicles and pay their own transportation costs, including fuel and insurance. Drivers also paid all taxes and workers’ compensation costs. Dynamex obtained the customers and set delivery rates. Some drivers received flat fee, others received a percentage of the delivery fee.
While drivers could set their own schedules, they were required to notify the company of their availability, were expected to wear Dynamex shirts and badges and sometimes attached Dynamex logos to their delivery vehicles. Drivers were allowed to make deliveries for other companies, as well as their own.
Justices determined the arrangement did not meet the new, stricter ABC test, which employers now must meet in classifying workers as independent contractors.
While few specific guidelines have been issued for the implementation of the ABC test, it is clear that employers should audit their current practices and consult with human resources specialists and labor attorneys to determine if they are in compliance.
I am being asked by clients if the ruling and ABC test will be applied retroactively. In other words, will past nonconforming practices open employers up to legal changes and punishment. Reportedly, state Supreme Court justices have not yet decided that question.
But now employers must focus on their present use of independent contractors and ensure that they are meeting the ABC test.
Karen Bonanno is president of the Bakersfield-based human resources consulting firm P.A.S. Associates and P.A.S. Investigations. She can be contacted through her website www.PASassociates.com and through the P.A.S. Facebook page.