After nearly two decades of litigation, the California Supreme Court pronounced a new standard for determining whether a worker is categorized as an employee or independent contractor. In this decision, delivery drivers who were once categorized as employees and later reclassified as independent contractors filed suit alleging they performed the same tasks despite their classification change.
The new test is a short and sweet 3-prong standard, which makes it drastically more difficult for businesses to classify their works as independent contractors. To properly categorize a worker as an independent contractor, an employer must be able to show all three of the following requirements under the new “ABC” test.
1.The worker is free from the control and direction of the hirer in connection with the performance of the work
This prong of the ABC test is the most similar to the now expired standard for independent contractor status. Simply put, if a worker is subject to the type and degree of control a business normally exercises over its employees, the worker should also be categorized as an employee. However, it is now the business’ obligation to prove this fact.
2. The worker performs work that is outside the usual course of the hirer’s business; and
Prong B is where the game really changes. The Court concluded that if a worker’s services are provided within the usual course of business and others would view the worker’s services as performing work typical of that business, then the worker is an employee. This logically expands the definition of an employee to include anyone who is engaged in the same business as the hiring entity.
The Court painted this picture: if a retailer hires a plumber or electrician to perform maintenance at their establishment, an independent contractor relationship is created. If a bakery hires a cake decorator, or a clothing manufacturer hires a seamstress that works at home, these workers are employees.
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same natures as the work performed for the hirer.
While Prong C does not require a worker to obtain licensing as a business entity, the worker must have taken some steps to create their independent business. The Court will evaluate whether it was the worker’s decision to go into business independently or whether the hirer made this decision for the worker.
While some businesses prefer to categorize workers as independent contractors to avoid paying taxes and sidestep an ever-expanding body of minimum wage and overtime law, the risks now may be enough to encourage businesses to gladly accept previously avoided consequences of categorizing a worker as an employee.
All businesses which define workers as independent contractors should perform an evaluation to determine whether such contractors fit into the new ABC test. Businesses’ exposure for improperly categorizing employers certainly increases under the new ABC standard.
Not sue about your employee or contractor status, Tencer Sherman can help in the following areas: