Impact of the California Supreme Court’s New “ABC Test” for Independent Contractors

Dynamex Operations West, Inc. v. Superior Court – The Impact of the California Supreme Court’s New “ABC Test” on Independent Contractor Status

The term “independent contractor” is thrown around by nearly everybody who is of working age. Most people who use this phrase have no idea that “independent contractor” is a legal status, not a label that can be placed an employee by an employer – the status itself has a profound impact on an employee’s rights. Put simply, whether you are an “independent contractor” is a question of fact that exists independently of the subjective beliefs of both the employer and employee (prior to Dynamex Operations West, Inc. v. Superior Court 4 Cal.5th 903 (2018), the subjective beliefs of the parties are a secondary factor to consider pursuant to the factors set forth in S.G. Borello & Sons, Inc v. Department of Industrial Relations 48 Cal.3d 341 (2014)).

This article will address: (1) A brief overview of the rights afforded to employees, as opposed to “independent contractors”, under the relevant wage orders, (2) A brief history of the employee/”independent contractor” distinction, (3) A brief overview of the Borello factors, (4) A brief overview of the Dynamex “ABC Test”, and (5) A brief overview of the impact that the Dynamex case will have on the status of “independent contractor.”

What Rights Do I Have as an “Employee”?

Without getting into all the nuances of employment law, the Industrial Wage Commission (“IWC”) has issued seventeen (17) wage orders governing virtually every industry. Again, for the sake of simplicity, these wage orders dictate the rights of employees in the covered industry; provided the employee is not exempt (exemptions are beyond the scope of this article but will be discussed in another article). A quick way to determine which wage order applies to you can be found here (use the search function to quickly find your occupation and related wage order). Once you have found out which wage order applies to you, a list of those wage orders can be found here. We will use Wage Order No.4 -2011 for this section.

Hours and Days of Work – Section 3 encompasses, generally, the rules governing overtime. For example, an employee (as opposed to “independent contractor”) is entitled to 1 ½ their rate of pay for each hour worked beyond eight (8) hours in a day, for each hour worked over forty (40) in a workweek, or for the first eight (8) hours worked on the seventh (7th) consecutive work day in a work week. Further, an employee is entitled to double their rate of pay for each hour worked beyond twelve (12) hours in a workday, and all hours worked more than eight (8) hours on the employees seventh (7th) consecutive work day in a given workweek.

Meal PeriodsSection 11 governs the rules pertaining to meal periods. An employee is entitled to a duty-free meal break of thirty (30) for every shift exceeding five (5) hours unless the employee’s shift is scheduled for less than six (6) hours. Many employees do not know this, but a break where you are required to remain on-call is non-compliant with the wage order (unless there is a valid on duty meal period agreement “ODMPA”, which is beyond the scope of this article). If you have not been given a proper meal period, the employee is entitled to one (1) hour of pay, this is called “premium pay.”

Rest PeriodsSection 12 governs the rules pertaining to rest periods. An employee is entitled to a duty-free rest period of ten (10) minutes for every four (4) hours that employee works. Much like meal periods, though far harder to prove, an employee who is not provided a compliant rest break is entitled to one (1) hour of regular pay, this is also “premium pay.” It should be noted that the law only allows “premium pay” penalties for one (1) missed meal period per day, and one (1) missed rest period per day.

While this list is not complete, these are common areas where the distinction between “employee” and “independent contractor” are most important; if you are misclassified as an “independent contractor”, when you are in fact an “employee”, your employer may not be paying you overtime properly, giving you rest and meal breaks, and paying you “premium pay” for those missed breaks – this can add up to a significant sum of money.

Example: Eric Employee has been misclassified as an “independent contractor” for the last four (4) years. Eric makes $10.00 per hour and works five (5) days per week – he has never received a meal or rest break. Using premium pay alone, Eric is entitled to (208 weeks [52*4] x 5 days per week x 2 [premium pay for both missed breaks] x $10.00 per hour) $20,800.00 in unpaid premium pay.

As you can see, being improperly classified can have a negative financial impact on “employee”, and a positive financial impact on the employer. The next section will briefly address how we got to our modern understanding of the distinction between an employee and an “independent contractor.”

The History of the Employee/Independent Contractor Distinction

Prior to 1989, when the California Supreme Court issued its decision in Borello, the Courts utilized the common law concept of “control of the details” to determine whether someone was an employee or an “independent contractor” in situations such as unemployment insurance (Tieberg v. Unemployment Ins. App. Bd 2 Cal.3d 943 (1970)). Other Courts identified “secondary factors” to be considered when determining whether an individual was an employee or an “independent contractor.” This set the stage for the Borello decision.

The Borello Factors

At the time of the Borello case, previous case law had essentially established that the primary factor, when determining whether someone was an employee or an “independent contractor”, was “control of the details.” Numerous other cases had identified a plethora of “secondary factors”, and the California Supreme Court established the test to determine whether an individual was properly classified as an “independent contractor” who would not gain the benefits of certain protections and “employees” who would gain the benefits of those protections. The “secondary factors” included:

  1. Whether the individual who is working is working in a business or occupation that was distinct from the business they were helping;
  2. Whether that work was a part of the general business of the person they were helping;
  3. Whether the person performing the work provided the location for their work to be done, the instrumentalities necessary for doing the work, and the tools required for doing that work;
  4. How much the worker had invested in their own materials, equipment, and assistants;
  5. Whether the work done required a special skill-set;
  6. Whether the type of work being done, in that area, was usually conducted under the supervision of another person, or whether it was typically performed by a specialist without the need for supervision;
  7. Whether the worker had an opportunity to share in loss or profit, based on their ability to manage other workers;
  8. How long the worker was expected to provide service;
  9. How permanent the working relationship was;
  10. (10)Whether the worker was paid by the job, or paid by time; and
  11. (11)The subjective beliefs of the individuals engaged in business together.

Until the Dynamex decision, any questions regarding an individual’s status as an employee or an “independent contractor” was resolved by first analyzing the “control of the details” test, and then looking at the “secondary factors” listed above. This test was used for all issues where the classification of an individual was determinative of their rights under the law. In 2018, the California Supreme Court changed the rules as it relates to an individual’s rights under Industrial Welfare Commission’s Wage Orders (see above for a discussion of IWC Wage Orders). As we will discuss below, the test for whether an individual is an “independent contractor” for purposes of the gaining the protections afforded to employees under the relevant Wage Orders, the California Supreme Court adopted the “ABC Test.”

Dynamex and the “ABC Test”

On April 30, 2018 the California Supreme Court issued a decision that changed the legal landscape as it relates to the status of an individual as an employee or “independent contractor” for purposes of gaining the benefits afforded by the various Wage Orders. As mentioned above, this has significant implications as it relates to “premium pay” and overtime pay. The “ABC Test” starts with the presumption that all individuals who are working for another person are employees. This presumption places the burden on the employer to satisfy all three (3) prongs of the “ABC Test” to classify an individual as an “independent contractor.” The three (3) prongs of the “ABC Test”, which must be proven in the affirmative, are:

  1. Whether the worker is free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of work and in fact. – This is a more thorough version of the “control of the details” factor mentioned above. This prong however, requires the employer to show that not only was the contract clear that the worker would be free from control, but that when performing the work, they were free from control. Frequently, a contract would say that the worker would be free to work without supervision, but the employer would still exercise “control of the details” and attempt to hide behind to the contract itself to avoid liability.
  2. Whether the worker perform work that is outside the usual course of the hiring entity’s business – This factor is perhaps the most important change to the analysis of an individual’s status as an employee or an “independent contractor.” Essentially, if the work performed is part of the hiring entity’s regular business, the worker is an employee. The Dynamex Court used two examples to highlight their position:
    1. An electrician who was hired to install a new electrical line at a retail store, or an outside plumber who is hired to repair a leak in a bathroom is an “independent contractor” – their work has nothing to do with the retail store’s regular business.
    2. A work-at-home seamstress who has been hired by a clothing manufacturer to make dresses from cloth and patterns provided by the company that will thereafter be sold by the company is an “employee.”
  3. Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed by the hiring entity – This appeared to be an opportunity for the employer to save themselves if (2) was answered in the negative. An individual can be an “independent contractor” notwithstanding the fact that they are engaged in the same business the hiring entity is engaged in, if they have their own independently established business that performs those services.

What Impact Does Dynamex Have on the Employee/” Independent Contractor” Distinction

As mentioned above, the Dynamex case placed the burden on the employer to show that the “ABC Test” was satisfied in favor of finding that an individual is an “independent contractor.” This burden, in turn, makes it much more difficult for an employer to gain the benefit of calling an individual an “independent contractor” while simultaneously protecting workers rights under the wage order. Dynamex did not affect employee benefits outside the Wage Order context, and the Court went to great lengths to make that clear. The bottom line after the Dynamex case is this: if you are currently classified as an “independent contractor”, and you are not receiving overtime or “premium pay”, it may be in your best interest to contact an attorney today.

At Yeremian Law, we have ample experience pursuing claims for misclassification and obtaining the benefits our employees would have received had they been properly classified as employees in the first place. This is not exploiting a loophole in the law, it is pursuing what you were entitled to in the first place. Contact us today for a consultation!

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