A three-part test announced Monday by the California Supreme Court has far-reaching implications for who in the state can be classified as an independent contractor.
The 7-0 decision in a case brought by drivers working for a delivery company squarely adopts the so-called ABC test to determine who may be classified as an independent contractor in cases involving minimum wage and overtime payments. That test, adopted by a majority of states, presumes a worker is an employee. It is up to the employer to prove independent contractor status by meeting each of three criteria, which the California court laid out in the decision:
(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 such 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 the work performed for the hiring entity.”
The decision specifically applies to wage orders of the state’s Industrial Welfare Commission, which regulates wages, working hours, work breaks and other conditions. By designating workers as independent contractors as did Dynamex Operations West, the company in this case sued by its drivers, businesses can ignore minimum wage laws when setting payments, avoid overtime and other work rules, as well as avoid paying payroll taxes to the state. The Los Angeles Times reported that “the misclassification of workers as independent contractors costs the state roughly $7 billion in lost payroll taxes each year.”
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That latter point wasn’t lost on the California court, which quoted a law review article that noted “the ABC test allows courts to look beyond labels and evaluate whether workers are truly engaged in a separate business or whether the business is being used by the employer to evade wage, tax, and other obligations.”
But the court also expressed concern that workers are being unilaterally declared contractors by their employers. “As a matter of common usage, the term ‘independent contractor,’ when applied to an individual worker, ordinarily has been understood to refer to an individual who independently has made the decision to go into business for himself or herself.” The provided these examples: a plumber hired by a store to repair a leak or an electrician hired to run a new power line “are not part of the store’s usual course of business” and thus, under the “B” part of the test are legitimately independent contractors. But a work-at-home seamstress making dresses from cloth and patterns supplied by a clothing manufacturer would be doing work that is withing the usual course of the hiring entity’s business.
The implications for businesses in the gig economy are potentially far-reaching. A statement from the National Employment Law Project said, “It means that companies in industries from construction to tech to homecare and trucking will no longer be able to dodge minimum wage laws by pretending that the workers who form their workforces are somehow not their employees.”
Two of the leading companies in the gig economy — Uber and Lyft — are likely to have to reclassify their California drivers. USC Law Professor Michael Chasalow told the Times that drivers for the two companies are employees because providing rides is the usual course of business for them.