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The New ABC's of Properly Classifying a Worker as an Employee or Independent Contractor

By Thomas M Lee

The California Supreme Court issued a landmark decision in the matter of Dynamex Operations West, Inc. v. Superior Court of Los Angeles earlier this year establishing a new and employee-friendly test in determining whether an employee has been misclassified as an independent contractor.

In particular, the Court embraced a standard presuming that all workers are employees instead of contractors, and placed the burden on any entity (business, corporation, or person, etc.) classifying an individual as an independent contractor of establishing that such classification is proper under a newly adopted “ABC test.”

Under the ABC test, a worker will be deemed to be an employee and not an independent contractor unless the entity proves:

(A) that 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 for the performance of the work and in fact;

(B) that the worker performs work that is outside the usual course of the hiring entity’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.

Note that each of these requirements need to be met in order for the presumption that a worker is an employee to be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor.

The question of whether an individual worker is properly classified as an independent contractor or an employee has considerable significance for workers, businesses, and the public generally. If a worker is classified as an employee, the employer bears the responsibility of paying Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and of course, complying with the myriad of state and federal statutes governing the wages, hours, and working conditions of employees.

As a result of this case, any businesses operating in California that treat workers as independent contractors should confer with their legal counsel to review the relationship under the “ABC test” and determine whether any or all such workers should be reclassified.

For example, prong B of the ABC test is particularly troublesome for any businesses that use independent contractors to deliver or provide their core product or service. In applying the ABC test, the Court noted that delivery drivers could be considered as employees because the question of whether the delivery drivers were performing outside the usual course of the entity's business would be resolved in the employee's favor is the core of the business is based on deliveries.