How Has the Dynamex Ruling Changed Independent Contractor Classification in California?
The proper classification of employees and independent contractors (also commonly referred to as “1099 employees”) has always been a bit tricky. Getting it wrong means employers could be on the hook for back pay and penalties, which add up very quickly. Now, the Supreme Court has changed the test for who can be properly classified as an independent contractor. The new standard was announced in the case of Dynamex Operations West, Inc. v. Superior Court (Dynamex). Under the new test, fewer workers will qualify as independent contractors.
What Was the Previous Test for Determining Independent Contractor Status?
Previously, the analysis consisted of looking at a number of factors, such as the company’s right to control and supervise the worker, whether the company or the worker provides the tools with which to perform the work, whether the company is the main source of income for the worker, and whether the parties believe the worker is an independent contractor.
What Is the New Three-Part “ABC Test” for Independent Contractors?
The test now is distilled to three factors, all of which must be present for a worker to properly be classified as an independent contractor:
A) the worker is free from the control and direction of the hirer in connection with the performance of the work, under the contract for the work, and in fact;
B) the worker performs work that is outside the usual course of the hiring entity’s business; and
C) 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.
Which Factors Are Most Likely to Cause Compliance Issues for Employers?
Employers will likely be familiar with, and already in compliance with, factor A. Independence has previously been a significant factor in the classification test (hence the name). Factor C is also similar in principle to factors in the previous test, but goes further in requiring that the worker have an “independently established” business. In Dynamex, this meant drivers didn’t hire other drivers or perform work as drivers for other companies or private clients.
Why Is Factor B Considered the Most Challenging Part of the ABC Test?
Factor B will likely be the most problematic for many businesses that use independent contractors. In the case that was before the Supreme Court, the workers seeking employee status were delivery drivers. Dynamex is a package and document delivery company. Even though the workers had control over their schedules and hours, and there were many other aspects of their work that have previously been indicators of independent contractor status, the Court ruled they could pursue their claims as employees. Independent contractors must perform work that is outside of the company’s usual course of business.
How Far Will the Dynamex Decision Reach Beyond Wage Orders?
The Court interpreted the definition of employee under the wage orders of the Industrial Welfare Commission. Those wage orders have rules governing worker conditions, the most well-known being minimum wage, overtime pay, meal periods, and rest breaks. There are other contexts where the definition of “employee” comes into play, including laws and regulations enforced by agencies such as the IRS, EDD, INS, Workers’ Compensation, and US Department of Labor. It remains to be seen how far the implications of this ruling will reach.
What Should Employers Do If They Have Questions About Contractor Classification?
If you have questions about your company’s use of independent contractors, call Fairgrieve Law at 415-890-6057.
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