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.
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