Employee or Independent Contractor? California’s New “ABC” Test

The decision whether to classify a worker as an employee or an independent contractor can have a significant impact on both the worker and the business. As an employee, a worker is entitled to the protections of the labor laws, including payment of minimum wage and overtime, meal and rest breaks, paid sick leave, and other workplace protections. An employer is also responsible for paying an employee’s federal Social Security and payroll taxes, employment taxes, unemployment insurance taxes, and providing worker’s compensation insurance. On the other hand, independent contractors obtain none of these numerous labor law benefits, and the business does not bear any of these costs or responsibilities.

Although in some circumstances classification as an independent contractor may be advantageous to workers as well as to businesses, many unscrupulous employers misuse the independent contractor label to circumvent the labor laws and to obtain an unfair competitive advantage over competitors who properly classify similar workers as employees. The result is that many California workers have been denied proper compensation and the labor law protections to which they were entitled.

California’s New “ABC” Test for Independent Contractors

In a recent decision Dynamex Operations West, Inc. v. Superior Court (SC S222732 4/30/18), the California Supreme Court cracked down on the misclassification of workers as independent contractors and created a new “ABC” test to determine when a worker should be properly classified as an employee. Under this test, a worker is properly considered an independent contractor only if the employer establishes: (A) that the worker is free from the control and direction of the employer in connection with the performance of the work; (B) that the worker performs work that is outside the usual course of the employer’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the employer.

Misuse of the independent contractor label may subject an employer to significant liability for unpaid wages, overtime, missed meal and rest breaks, and other Labor Code violations.