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In a much-discussed decision, the California Supreme Court announced a significant change in independent contractor law, and has adopted a simpler “ABC” test for determining whether an individual is an employee.   This new independent contractor test is modeled on Massachusetts’ independent contractor definition, which may very well be the strictest in the country.  

The New Independent Contractor Test

Since 1989, California courts and state agencies have long applied what is known as the Borello test for analyzing whether a worker was an independent contractor under the Industrial Welfare Commission Wage Orders.  This flexible approach looked predominantly at whether the hiring entity had a “right to control” the manner in which the worker performed the contracted service, along with eight other “secondary” factors, such as whether the worker was engaged in a distinct occupation or business, the skill required in the particular occupation, and whether the worker or the hiring entity supplied the tools and/or equipment used to perform the work, and the place where the work was performed

Despite the Borello test being since 1989 for Wage Order cases, the California Supreme Court rejected it in favor of a more rigid three-factor approach, often called the “ABC” test.  Under this new test, a person will be considered an independent contractor only if the hiring entity can prove all three of the following:

(A) that the worker is free from the control and direction of the hiring entity 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 the work performed.

The California Supreme Court didn’t offer much guidance about these three prongs.  It noted that the “A” prong (freedom from control and direction) is similar to the common-law test used in Borello, asking whether the person is free from the “type and degree of control a business typically exercises over employees.”  The “B” prong (that the service the employee provides is outside the usual course of the business) focuses on whether the person is “providing services to the business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor.”  And the “C” prong (independent trade, occupation, or business) asks whether the person “independently has made the decision to go into business for himself or herself,” evidenced by things such as “incorporation, licensure, advertisements, [or] routine offerings to provide the services of the independent business to the public or to a number of potential customers.”  While presenting limited substantive guidance, the Court did make clear that it intended this new ABC test to be stricter than the Borello test.

Notably, this new independent contractor test only applies to Industrial Welfare Commission Wage Orders.  The California Supreme Court did not make any rulings about whether this test would also apply to other wage and hour laws, such as claims for reimbursement for business expenses, but the opinion suggests such laws will remain subject to the Borello standard.

Control-of-Work Test

In expanding the definition of employee, the Supreme Court examined at length, but ultimately deemed as non-exclusive, the nearly 30-year-old analysis established in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 796 P.2d 399 (Cal. 1989), which it acknowledged was “the seminal California decision on the subject.”

In Borello, the Supreme Court had adopted, in the context of a workers’ compensation claim, the common law “control-of-work” test. The test asks “whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.”

The Court in Borello further identified several non-exclusive factors that inform the analysis, including:

• The right of the employer to discharge the individual without cause;
• Whether the individual is engaged in a distinct occupation or business;
• Whether, in the location at issue, the work is usually done without supervision by the employer;
• The skill required in the particular occupation;
• Whether the employer or the individual supplies the necessary equipment, tools, and place of work;
• The length of time for which the services are to be performed;
• Whether payment is made by the job or by the time spent;
• Whether the work is a part of the employer’s regular business; and
• The apparent intent of the parties as to whether an employer-employee or independent contractor relationship exists.

ABC Test

Noting that the pertinent state wage order (covering matters such as minimum wages, maximum hours, and meal and rest breaks) defines the term “employ” as “to engage, suffer, or permit to work,” the Supreme Court concluded in Dynamex that, in light of the history and remedial purpose of the wage order, the more appropriate analysis for determining whether an employer-employee relationship exists is the “ABC Test” adopted by some other state courts.

Under the ABC test, a worker is presumed to be an employee unless the worker:

(A) Is free from the employer’s control and direction;

(B) Performs a service that is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

(C) Customarily engages in an independently established trade, occupation, profession, or business.

While recognizing the importance of the factors set forth in Borello, the Court concluded that Borello’s highly nuanced, multi-factor test “makes it difficult for both hiring businesses and workers to determine in advance how a particular category of workers will be classified, frequently leaving the ultimate employee or independent contractor determination to a subsequent and often considerably delayed judicial decision.” The result of such circumstances “often leaves both businesses and workers in the dark with respect to basic questions relating to wages and working conditions that arise regularly, on a day-to-day basis.” Moreover, the Court explained, application of a more complex, multi-factor test “affords a hiring business greater opportunity to evade its fundamental responsibilities under a wage and hour law by dividing its work force into disparate categories and varying the working conditions of individual workers within such categories.”

In adopting the simpler ABC test, the Court noted that, by being presumptively classified as employees, workers would have the benefits and protections of the wage order available to them, while companies would be protected against competitors who attempt to save costs by circumventing the wage orders’ obligations.

If you have questions about the status of your employees, or your independent contractors, contact your labor or employment attorney!