California Supreme Court Adopts “ABC Test” to Evaluate Independent Contractor Status

May 2, 2018

On April 30, 2018, the California Supreme Court issued a long-awaited opinion in Dynamex Operations West, Inc. v. Superior Court, clarifying the legal standard for distinguishing between employees and independent contractors. The court adopted a standard utilized in other jurisdictions — the “ABC” test — to provide, in the court’s view, greater clarity and consistency in distinguishing between employees and independent contractors. However, the court’s adoption of the ABC test also represents a greater risk for companies who rely upon independent contractors.

Since 1989, California courts have used a multifactor, common-law test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations to determine whether an individual is properly classified as an independent contractor. The Borello test principally involves determining whether the company has the right to control the manner and means of accomplishing the result desired, and looks to nine additional factors that are intertwined and given varying weight depending on the circumstances.

In Dynamex, a group of same-day delivery drivers alleged that they were misclassified as independent contractors instead of employees, resulting in Dynamex not paying them overtime, not providing them itemized wage statements and not reimbursing them for business expenses. The drivers asserted that Dynamex violated the California Labor Code, as well as California Industrial Welfare Commission Wage Order No. 9, which covers the transportation industry.

The drivers moved for class certification and claimed that the proposed class members were employees so long as Dynamex knew the drivers were providing services or negotiated the rates provided to the drivers. The trial court granted class certification, finding that the common legal and factual issues relating to proper classification of the drivers predominated over potential individual issues. The trial court relied upon three alternative definitions of “employ” set forth in the applicable wage order: (1) to exercise control over the wages, hours or working conditions; (2) to suffer or permit to work; or (3) to engage, thereby creating a common-law employment relationship. The trial court rejected Dynamex’s argument that the Borello standard was the only appropriate standard for determining independent contractor status.

Dynamex appealed, arguing that the trial court applied the wrong test for determining independent contractor status. The Court of Appeal rejected Dynamex’s argument that the wage order’s definitions of “employ” and “employer” are limited to the joint employer context and are inapplicable to determining employment status. The Court of Appeal concluded, however, that the Borello standard is the applicable standard for all causes of action not governed by the wage order.

The California Supreme Court Ruling

The California Supreme Court affirmed the appellate court’s ruling and upheld the trial court’s class certification order. The high court concluded that a court may rely on the “suffer or permit to work” definition of “employ” contained in the wage order when evaluating whether a worker is an independent contractor or employee for claims pursuant to the wage order. But, the court rejected a literal application of the “suffer or permit” definition, and instead relied on a standard commonly referred to in other jurisdictions as the “ABC” test to determine whether a worker is properly considered an independent contractor.

The ABC test is simpler and more structured than the Borello standard. Under the ABC test, all workers are presumed to be employees unless the hiring business demonstrates that the worker satisfies each of three conditions: (A) 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 and in fact; and (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed. Applying this standard, the court concluded that the drivers had established that commonality existed with respect to all three conditions and class certification was appropriate.

The court expressly limited its ruling to claims asserted by purportedly misclassified independent contractors arising under the wage order, as neither party had petitioned the court to review the appropriate standard for claims arising under the Labor Code or other statutes.

Consequences for Employers

Due to the expansive reach of the “suffer or permit to work” standard — which appears in wage orders governing all industries in California, not just the transportation industry — the California Supreme Court’s decision may have a significant impact on wage and hour claims in California. Application of the ABC test may make it more difficult to classify workers as independent contractors rather than as employees, and may make it more difficult for companies to defend that classification — on both an individual and class basis. Companies that utilize independent contractors should consider whether those workers are properly classified under the ABC test.

For further information or questions about the information contained in this legal alert, please contact the authors, your McGuireWoods contact or a member of the firm’s labor and employment team.