California Supreme Court Establishes New Employee-Friendly Misclassification Standard

Employers that have operations or contractors working in California, beware. On April 30, 2018, the California Supreme Court issued an opinion establishing a new pro-employee standard in worker misclassification cases arising under California state wage and hour law. The opinion overturned three decades of precedent and will likely lead to more rulings that “independent contractors” have been misclassified and are actually employees.

California courts had long applied what is known as the Borello test for determining whether an individual is a contractor or employee under California wage and hour law. This was a multi‑factor test that required courts to engage in a “totality of circumstances” analysis of several factors, with no single factor being determinative. In its April Dynamex v. Lee ruling, the California Supreme Court set aside the Borello test in favor of a more rigid, streamlined three‑factor test. Under the new test, an individual will be considered an independent contractor only if an employer can prove (1) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work—both under any written contract terms and in actuality; (2) that the worker performs work that is outside the usual course of the hiring entity’s business; and (3) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The first factor of the new test—the degree of control—examines whether the individual is able to freely conduct the method in which s/he performs the prescribed work. Importantly, the Dynamex Court held that, even if an employer has not exercised this degree of control over the individual, the mere possibility that it could do so pursuant to an agreement is still evidence of employee status. The second factor—type of services provided—examines whether the individual is performing services integral to the specific business or a support function that is more general in nature (such as accounting or human resources). The third factor—independence—examines whether the individual has truly gone into business for him/herself and plans to serve other companies other than the one with which s/he has the engagement. For example, if the individual has set up a corporate entity through which to provide similar services to multiple companies, this would be evidence of contractor status. 

In announcing the new standard, the Dynamex Court essentially held that it would presume employee status unless an employer can prove all of these factors. Although this decision will provide greater clarity on worker status in California, the standard is considerably stricter than the previous Borello standard and more friendly to individuals claiming employee status. 

Although the Dynamex decision technically only applies to claims brought under California wage law, it represents a major shift in the law in the worker classification area. Other jurisdictions may take notice and decide to alter their standards as well (either legislatively or judicially) to make it more difficult for employers to establish “contractor” status. Courts around the country may also use the Dynamex analysis under other employment laws, such as to determine worker status under workers’ compensation, unemployment benefits, or tax laws.