California Supreme Court Adopts New Wage Order Worker Classification Test

On April 30, 2018, the California Supreme Court adopted a new test for classifying workers as independent contractors for purposes of the California wage orders. In Dynamex Operations West, Inc. v. Superior Court, the Supreme Court ruled that employers must use a three-part “ABC test” to establish whether a worker may be properly classified as an independent contractor for this purpose.

Worker Classification

Whether a worker is covered by a particular law or is entitled to receive a particular benefit often depends on whether the worker is an employee or an independent contractor. In general, employment laws, labor laws and related tax laws do not apply to independent contractors.

For purposes of federal labor and employment laws, no standard test has emerged to determine the true character of an independent contractor relationship. In fact, employers may have to apply various tests to determine how issues of employment benefits, workers’ compensation, unemployment compensation, wage and hour laws, taxes or protection under Title VII of the Civil Rights Act, the American with Disabilities Act (ADA), and the Family and Medical Leave Act (FMLA) affect their workforces.

In addition, employers should be aware that state and local variations of these tests may apply in certain situations.

California Wage Orders

Several federal laws regulate wage and hour requirements. California law also imposes state wage and hour requirements. When federal and state laws are different, the law that is more favorable to the employee will apply.

The Industrial Welfare Commission (IWC), part of the California Department of Industrial Relations (DIR), established wage orders to enforce and administer California’s wage and hour requirements throughout the state. Because the IWC is no longer in operation, the Division of Labor Standards Enforcement (DLSE) currently enforces the wage orders.

In total, there are 17 California wage orders, plus a minimum wage order, that California employers must comply with. Each wage order covers a separate industry and imposes requirements relating to minimum wages, work hours and basic working conditions (such as meal and rest periods) for California employees.

Overview of Dynamex v. Superior Court

In Dynamex v. Superior Court, the California Supreme Court was asked to determine what standard applies under California law for purposes of determining whether workers should be classified as employees or as independent contractors under the California wage orders. In this case, a group of delivery drivers sued their employer, Dynamex, arguing that the drivers had been misclassified as independent contractors, rather than employees. The delivery drivers claimed that, due to this misclassification, Dynamex violated Wage Order No. 9 (the applicable order governing the transportation industry), as well as various sections of the California Labor Code.

Prior to 2004, drivers working for Dynamex who performed similar pickup and delivery work as the current drivers were classified as employees. In 2004, however, Dynamex adopted a new policy and contractual arrangement under which all drivers are considered independent contractors, rather than employees. Dynamex argued that, in light of the current contractual arrangement, the drivers are properly classified as independent contractors.

The Supreme Court’s ruling—The “ABC Test”

Historically, courts have applied a multifactor balancing test in determining whether a worker is an employee or an independent contractor. However, the California Supreme Court abandoned the traditional balancing test, and instead adopted a new three-part test that California employers must use when determining whether a worker can be classified as an independent contractor for purposes of the wage orders.

This three-part test is commonly referred to as the “ABC test” due to its three factors to consider. Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the employer establishes that all of the following are true:

• That the worker is free from the control and direction of the employer in connection with the performance of the work, both under the contract for the performance of the work and in fact;
• That the worker performs work that is outside the usual course of the employer’s business; and
• That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the employer.

This test generally favors a determination that workers are employees, rather than independent contractors. The ABC test presumes that all workers are employees and allows workers to be classified as independent contractors only if the employer demonstrates that the worker in question satisfies each of the three conditions.

Impact on Employers

Employers that employ independent contractors in California will want to ensure that their workers are properly classified under the new ABC test adopted by this ruling. As a result, these employers should review their employment relationships and contractual arrangements to evaluate the impact that this ruling may have on their business.

Employers in California should also keep in mind that this ruling applies for purposes of the California wage orders only. Other existing worker classification tests continue to apply for federal law purposes.

More Information

Contact Scurich Insurance for more information on wage and hour laws in California.