Employee or Independent Contractor? Answer is as easy as ABC!

Practice Areas

By: Shagun Parekh

The definitions of these classifications have been up for debate for a long time now but may just have been put to rest by the recent developments in the Golden State. To backtrack, on April 30, 2018 the California Supreme Court had issued a landmark decision in Dynamex Operations West v. Superior Court in which the Court chose to do away with the Borello test (old test) which determined whether a worker is an employee or an independent contractor for claims brought under the Labor Code. Among the many questions that the judgement left open ended, one was that of the retrospective effect of this change.

In the Dynamex Era, the simplified “ABC Test” is applicable which places the burden on the business to prove that a worker is an independent contractor rather than an employee. A failure to do so deems that a worker will be considered to be an employee. If a business wants to meet its burden under this ABC Test, a business must establish all of these three prongs:

  1. Show that the worker is free from the control, instruction and direction of the hiring entity in connection with the performance of the work, both under any contract as well as in fact;
  2. Show that the worker performs work that is outside the usual course of the hiring entity’s business; and
  3. Show that the worker is customarily engaged in an independently established trade, occupation or business.

Last week, the Second Appellate District ordered a Los Angeles state court to reconsider a decision declining to certify a proposed class action by ordering that the Dynamex decision applies to claims that predate it. Previously, in October 2018, the Garcia decision also applied the Dynamex test retroactively in a cab driver’s misclassification suit, but the employer in that case never argued against this application.

Recently, the Ninth Circuit asked the California Supreme Court to decide whether the Dynamex decision is applicable retrospectively since this issue has been heavily litigated since the April judgement was given. The Ninth Circuit has tip toed into the retroactivity arena in May 2019 where they applied the ABC test to claims predating Dynamex but later in July the opinion was withdrawn.

California state court judgements are presumed to be retroactive so even if there is no clarification from the bench in Dynamex, the Second Appellate District cited that there is no reason to depart from the Dynamex standard. Dynamex does not establish a new standard but rather streamlines the old one. The same panel has also expressed opinion that the ABC Test will apply not only to determine employee status under the wage order but also to other Labor Code claims.

The resolution of this aspect is important for all employers as misclassifying workers can have a potentially perilous impact on businesses. If a worker should be classified as an employee, the business bears responsibility for several government mandated procedural costs Although misclassification itself is not a violation; failure to pay a misclassified employee what he or she should have been paid is the violation.

However, employers and employees will be closely following the recent signing of the Assembly Bill 5 which makes the ABC test applicable across the spectrum of California employment law and will be in effect January 1.

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