The New “ABC Test” For California Employees and Its Potential Impact On The “Gig Economy” And Otherwise

On April 30, 2018, the California Supreme Court issued its decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, 2018 Cal. LEXIS 3152 (Cal. Apr. 30, 2018), announcing new guidelines that could result in widespread reclassification of California workers and, at the least, presents significant new challenges for certain employers.

The classification of workers lies at the heart of the business models underlying many companies operating in the so-called “gig economy,” which emphasize part-time work, non-exclusivity and flexibility of hours, often through mobile applications that match workers with discrete jobs that the workers decide whether or not to take. These employers often seek to classify their workers as independent contractors, rather than employees, arguing that this characterization allows more flexibility for workers, as well as cost-savings that will be passed on to consumers.  In order to determine whether a worker should be deemed an employee rather than an independent contractor, California courts have historically focused on a number of factors, most importantly the degree of control exercised by the employer over how the worker performs his or her task. This approach has now changed.

Drivers of Dynamex, a delivery company, alleged that the company misclassified them as independent contractors in order to avoid paying them wages and benefits that they would receive if properly classified as employees. The California Supreme Court agreed and announced a new test (the “ABC test”) that presumes an individual is an employee unless the employer (who has the burden of proof) can satisfy all three of the following factors:

  • (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.

This test will make it more challenging for companies to label their workers as contractors, particularly for many “gig economy” companies, whose business models may be disrupted. On the other hand, there are still open questions, for example, whether a particular “gig economy” business is more of a platform (ie. an application that connects buyers with sellers) or a business that directly provides the relevant service and/or product, the answer to which is important to factors (B) and (C) of the ABC test.

Further, the decision is also significant for non-gig economy companies. Thus, while prior to Dynamex companies considered the ABC test factors as part of their multi-factored employee v. contractor analyses (with factor (A) having particular importance), they now need to revisit their classification decisions by treating each factor of the ABC test as dispositive. Similarly, being inadvertently characterized as a “joint employer” of workers who are leased, but perform the core functions of the business, is now of heightened concern.

If you would like to discuss these issues further, or have any questions about this blog, please contact us.