Employers Beware: A 2018 California Case Changed the Law for How to Hire Independent Contractors

A recent California Supreme Court decision found that independent contractors can now only be hired under narrower circumstances than before. The prior nine-factor test was broader, whereas the new three-factor test (the ABC Test) is much more restrictive regarding which workers can be hired as independent contractors. Dynamex Operations W. v. Superior Court, (2018) 4 Cal. 5th 903.

The ABC Test has been historically used in Massachusetts, New York, and New Jersey, and it provides as follows:

     (A) That the worker is free from the control and direction of the hirer 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 that involved in the work performed.

                Id. at 955-56.

So, what does this mean for employers? California’s adoption of the ABC Test means that every independent contractor relationship that you may have needs to be reevaluated in light of the new test.

Regarding the first factor (A), you as the employer should be sure to keep your control over independent contractors to a minimum. This means that you should not overly manage the way the independent contractor works. If you are unsure where this line is—as most people are since it is rather unclear—then it is a good idea to reach out to an attorney who can help with this analysis.

Regarding the second factor (B), the independent contractor cannot simply be doing the work that you do as the employer. The closer the duties of the independent contractor resemble the work that your business does, the more likely it is that the independent contractor should be classified as an employee instead.

This is perhaps the most problematic factor for California employers and independent contractors because it substantially limits instances in which independent contractor relationships are valid.

A simplified example of a valid relationship under this factor would be a law firm who hires a marketing professional as an independent contractor to do a marketing campaign for the firm. However, an example of an invalid relationship would be an accounting firm who hires an accountant to perform accounting work as an independent contractor; this accountant needs to be classified as an employee.

Regarding the third factor (C), the worker should be doing work that is customarily independent contractor work. The best example of such work is a plumber in business for his or herself. It is important to note, however, that this factor can, at times, be at odds with (B). So, again, if there is any confusion, then it is a good idea to reach out to an attorney who can help with this analysis.

Since the ABC Test is so new in California, it is difficult to ascertain how it will be implemented in California. That said, the adoption of the new test means that employers need to reevaluate their working relationships and perform a risk assessment as to how to comply with the new law.

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