On April 30 the California Supreme Court delivered a decision that overturns nearly 30 years of legal precedence for deciding who can or cannot be considered an independent contractor by establishing a rigid three-part test that is expected to wreak havoc on businesses that currently use contractors.
Attorney Ashton Riley has gone so far as to term the decision a “contractor apocalypse.”
The court tossed out a more flexible standard that had been in place since 1989, replacing it with what is called the “ABC Test” in other states like Massachusetts, Connecticut, Illinois and New Jersey—although the standard is interpreted differently in each state.
Under the new criteria, a worker will be considered an employee instead of a contractor unless the worker:
(A) 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) Performs work that is outside the usual course of the hiring entity’s business.
(C) Is customarily engaged in an independently established trade, occupation, or business.
If the relationship fails to meet just one of the three criteria, the worker is not considered an independent contractor under the law. To make matters worse, the California court holds that a hiring entity cannot satisfy part “B” by showing that the worker performs work physically outside of the employer’s place of business, which is allowed in some jurisdictions that use the ABC test.
Also, it is now no longer enough that a company has not prohibited or prevented a worker from engaging in an independent business in order to support the conclusion that a worker has independently made the decision to go into business for themselves. The burden is now on the business to demonstrate that every worker is not an employee by proving all three of these elements, points out Richard R. Meneghello, an attorney with the law firm of Fisher Phillips.
“The bottom line: It’s going to be a lot harder for some gig economy companies in California to withstand misclassification challenges,” he says. “As you can see, this test is very difficult to overcome and could require many businesses to restructure the very nature of the way they do their work, especially in light of the B and C prongs.”
Attorney Erin Norris Bass of the Steptoe & Johnson law firm expects the new test will pave the way for a new wave of wage-hour class actions, not just for companies like Uber and Lyft, but also will work a hardship on other businesses that have traditionally used independent contractors, like the trucking industry.
In fact, the state Supreme Court ruling came in a case involving drivers for a package delivery company called Dynamex Inc., which makes extensive use of independent contractor drivers throughout its network of nationwide operations.
At Dynamex, delivery drivers work on-demand using their own vehicles, set their own schedules, remain free to accept or reject an assigned delivery and receive pay based on a flat fee or a percentage of the delivery fee. But in California that means they are employees.
