CALIFORNIA SUPREME COURT ADOPTS NEW TEST
The California Supreme Court adopted a new test this spring to determine if a business’s workers are “employees” or “independent contractors” under California wage orders. Wage orders govern minimum wages, maximum hours, and meal and rest breaks for millions of California employees. The upshot of the decision in Dynamex Operations West v. Superior Court is it will be substantially harder for businesses to classify workers as independent contractors.
The Supreme Court ruled that all workers are preemptively employees under the wage orders and NOT independent contractors unless the hiring business establishes EACH of these three separate requirements.
First, is the worker free from the control and direction of the hirer in performing the work, both under the contract to do the work and in practice?
So, a worker who is, either by contract or conduct, subject to same type and degree of control as a business exercises over its employees should be considered an employee and not an independent contractor. But the business does not have to “control the precise manner or details of the work” to be an employer.
Second, does the worker perform work that is outside the usual course of the hiring entity’s business?
Is the worker reasonably viewed as performing services for a business comparable to an employee, instead of a traditional independent contractor? So, workers performing “services … within the usual course of the business” would “ordinarily be viewed by others as working in the hiring entity’s business,” and are employees, not independent contractors. Therefore, “an employee” now includes virtually all workers who engage in the same business as the hiring entity.
For example, if a retail business hired a plumber to repair a leak in a bathroom or an electrician to install a new electrical line in a store, the plumber or electrician would be providing services outside of the hiring company’s retail business, and should be independent contractors.
But if a clothing manufacturer hired a work-at-home seamstress to sew clothing using cloth and patterns supplied by the company and the business later sold the finished products, the seamstress would be an employee.
Similarly, if a bakery hired a cake decorator to work from home on a regular basis on its custom-designed cakes sold by the bakery, the decorator would likely be an employee.
Third, is the worker customarily engaged in an independently established trade, occupation or business of the same nature as the hiring entity?
Did the worker independently decided to go into business for herself? If so, she likely satisfied the third requirement. But, if the workers are “simply designated [as] … independent contractor[s] by the unilateral action of a hiring entity,” there is a substantial danger they will be found to be employees.
A business does not have to prove that the workers incorporated themselves, obtained business licenses, advertised their business, etc. to satisfy this requirement. However, just because a company does not prohibit a worker from engaging in such an independent business does not, by itself, prove that the worker independently made the decision to go into business for herself. And, in Dynamex, the hiring business could not satisfy the final requirement because the court found it unilaterally reclassified its delivery drivers as independent contractors to reduce its costs.
Key Take Aways
First, each business now has the burden of proving that its classification of workers as independent contractors satisfies each part of the new Supreme Court test.
Second, misclassification may expose businesses to substantial costs including attorney’s fees, fines, back pay, etc.
Third, prudent businesses will review their classification of workers now to confirm compliance with Dynamex and not wait to be sued to then deal with the issue.
Also, remember that the result in each case is dependent on its unique facts so the information in this post may not precisely apply to your business situation.