Independent contractor or employee? California Supreme Court adopts new classification criteria

On April 30, 2018, the California Supreme Court issued a ruling that makes it significantly harder for companies to classify workers as independent contractors for purposes of claims based on California’s 17 Wage Orders.

The new, so-called “ABC test” requires hirers to establish three factors before classifying a worker as an independent contractor:

1. That the worker is free from the control and direction of the hirer in the performance of the work, both under the contract for the performance of the work and in fact.
2. That the worker performs work that is outside the usual course of the hiring entity's business.
3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The traditional Borello test (also known as the “economic realities” test) may possibly continue to apply to claims of worker misclassification that are not based on alleged Wage Order violations. In S. G. Borello & Sons, Inc. v. Department of Industrial Relations, the California Supreme Court held that out of many factors, the primary factor to be considered under the Borello test is whether the hirer has control or the right to control the worker both as to the work done and the manner and means in which it is performed.

What happens next?

The April 30 ruling is likely to generate a flurry of cases in California courts as parties litigate which claims are and are not going to be subject to the ABC test.

Hirers and workers will also need to clarify whether past court decisions that discuss certain factors in Borello are similar enough to the factors in the ABC test to be relied on by hirers in classifying workers. The court’s failure to clarify whether the ABC test applies retroactively to relevant independent contractor classification decisions is also going to be a sticking point for many litigants.

What does this mean for employers?

The Supreme Court’s new ABC test is going to have a considerable impact on workers and hirers. Once a worker is classified as an employee, the hirer will be responsible for paying certain federal and state taxes and complying with state and federal labor and employment laws.

Because of some unanswered questions, hirers with independent contractors in California should consider reviewing their current independent contractor classification decisions using the new ABC test regardless of whether a Wage Order applies to them.

Disclaimer: The information provided in this post is provided for informational purposes only and should not be relied upon or construed as legal advice and does not create an attorney-client relationship. You should review with your legal advisors how the laws identified in this post may apply to your specific situation.