Earlier this year, the California Supreme Court published a decision that rewrote the rule on whether a worker is legally an independent contractor or an employee, making it much more difficult to categorize workers as a contractor. If you work with any contractors or hope to in the future, it is vital that you understand the new rule so you can avoid expensive lawsuits or fines later on.
The Rule
The case is called Dynamex* (pronounced “dynamics”), and many people have been calling this rule the “Dynamex rule” or the “ABC test.” This rule currently applies to California wage and hour laws (like overtime, breaks, minimum wage, and mandatory workers comp). The new test states the following:
There is a presumption that the worker is an employee. In order to be considered an independent contractor instead, the worker must satisfy ALL THREE of the following factors:
- The worker must be free from the control and direction of the payor in connection with the performance of the work, both under contract and in fact;
- The worker must perform work that is outside the usual course of the payor’s business; and
- The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed by the worker for the payor.
Let’s break those down:
Test Question A: Free From Control and Direction
This factor looks at your relationship with the contractor as a whole, and asks whether you have a right, based on the actual relationship between payor and worker, to control the work that the worker is doing. “Both under contract and in fact” means that you can’t just agree in writing that you don’t have control but then have control over them in reality. For example, if you’re an accounting office and you hire a plumber to fix the office toilet, you only get to control the outcome: you’re hiring them to fix the toilet, but don’t get to tell them by what method, with what tools, and even when to come and how long to stay. On the other side, if your same accounting firm hires an assistant to help with some admin work, and you require him to show up at the office at certain times and days, you’re telling him what to do with the mail and how to answer the phone, and giving him instructions on what work to do and when; this shows control over the work.
This factor is the one with the most wiggle room to design and structure the relationship to look like a contractor/client relationship instead of an employee/employer relationship; the less control you have over the manner and means, the more likely they’re a contractor. There is ambiguity built in about what counts as true control and how much control is required to make the worker an employee. To comply with this rule, make sure to do all you can to relinquish control over the method and means of your contractors’ work.
Test Question B: Outside the Usual Course of Business
This rule states that the work that the worker is doing for you should be outside the normal day-to-day operations of your business, and not part of the services your business regularly provides. Using our example above, your accounting firm isn’t in the business of providing plumbing services, so your plumber is clearly providing work outside the usual course of your business. But you can’t perform your services without doing admin work like answering the phones and opening the mail, so an administrative assistant is doing work within the usual course of your business.
With this rule, the court is communicating that they want only traditional contractor roles to be considered contractors: your professional plumbers, electricians, lawyers, accountants, etc. What they don’t want is for companies to hire employees but call them contractors to save money and get around the rules. Except what does “outside the usual course of business” mean? The lawyers are trying to figure it out, too.
A plumber at your accounting firm is clearly outside the course of usual business. But what about a wood finisher if you make custom cabinets? Or a copywriter if you’re an ad agency? What about a home care company that connects home care workers to families — is the purpose of their business to provide home care (in which case the workers would be employees), or is the purpose more of a concierge that connects workers with people who need them (in which case, the workers might be contractors).
The takeaway here is that employers need to do their very best to make sure that workers are not performing work that could be seen as vital to the work that the company does. This means you might have to more clearly identify, or even change, how you present what you do to the world.
Test Question C: Independently Established Trade
This factor requires that the work that the contractor is doing is work that the contractor is engaged in regularly as its own occupation. Your professional bookkeeper who has a full-time job, a website, and a regular book of business is customarily engaged in an independent bookkeeping occupation. Your cousin, who normally manages a coffee shop and who needs some extra money and is doing your books for you on the side, is not.
With this factor, the court is again attempting to require that only traditional contractor relationships, like plumbers, exist. This factor requires that the contractor basically has their own company doing the work that they’re doing for you. But again, what does this mean, exactly? What about a graphic designer on Fiverr; does that count as an independently established trade? What if they’re a professional consultant, but they’re only working for you and have only worked for you; can you prove that that’s an independent trade?
When hiring a contractor, do your best to hire contractors who have their own businesses offering the services you need, and who ideally have the trappings of a business like a website, business cards, and other clients.
Things We Still Don’t Know
This is a brand new rule, and it changes the legal landscape completely. It is now much more difficult to categorize someone as a contractor, and the entire gig economy now lives in a murky gray area. And it will be harder than ever for small businesses to get the help they need. On top of that, many workers who are currently working as contractors have likely just been reclassified as employees in one fell swoop.
We don’t know yet how agencies like the EDD, who currently have their own tests, will handle this new ABC test. It may be likely that they adopt it themselves, as a more sweeping rule, making it harder to be a contractor, because it is to their benefit for taxes and penalties.
We also don’t know how the courts will apply this over the years to different fact patterns. Many industries, like the health and beauty industries, have built their model around the use of contractors. And more people than ever before are freelancing, contracting, working for apps like delivery or driving services, and these people often want to be considered contractors. This rule is trying to protect people from the predatory Ubers of the world, who are trying to take advantage of people by forcing them to be classified as contractors. But what about the rest of us? It’s possible that this new rule will chill the growth of the gig economy, make people scared to hire contractors, and punish small businesses who are just trying to do the right thing. Only time will tell.
How to Proceed From Here
It’ll be a while until all of these questions and gray areas will be cleared up. In the meantime, what do you do?
- Ask yourself whether any of your current contractors might be considered employees under this new test. If they seem to be a contractor, ensure they satisfy the ABC test. If they don’t, you may have to reclassify them as employees. Misclassification can be very expensive, up to the point of being forced to close your doors, so act quickly and thoroughly.
- For current and future contractors, try to structure the relationship so you have as little control over the contractor as possible. Having a written independent contractor agreement is an important step in this process.
- Do your best to make sure that the work the contractor is doing is not part of your normal operations, even if the worker is part-time or temporary.
- Try to only hire contractors who have their own independent businesses doing what you’re hiring them to do for you.
- If you have any questions, contact us for help.
*Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, (2018).
