On April 30, 2018, the California Supreme Court upended the state’s independent contractor market with its decision in Dynamex Operations West v. Superior Court. The Court’s ruling changed the way the law will determine whether a worker is an employee or an independent contractor. The case discards the decades-old test of S. G. Borello & Sons, Inc. v. Department of Industrial Relations (Borello) and replaces it with a new “ABC Test.”
Under the previous Borello test, the courts would look at multiple factors to determine whether a worker should be categorized as an employee or independent contractor. The Borello test was arguably difficult for an employer to apply, as the importance of any one factor could vary from case to case. While Borello tended to focus on whether the worker had control over the work done, the manner it was done, and the means in which it was performed, there were also several secondary factors used to reach a conclusion.
These factors included:
(1) Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
(2) Whether or not the work is a part of the regular business of the principal or alleged employer;
(3) Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
(4) The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
(5) Whether the service rendered requires a special skill;
(6) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
(7) The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
(8) The length of time for which the services are to be performed;
(9) The degree of permanence of the working relationship;
(10) The method of payment, whether by time or by the job; and
(11) Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question.
While consideration and balancing of these factors were time-consuming and fact-intensive, it was clear that under Borello, companies could use independent contractors in their business.
In abandoning the Borello test, the Court established the following new ABC Test:
(1) 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;
(2) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(3) that the worker is customarily engaged in an independently established trade, occupation, or business.
To satisfy the ABC Test, the employer must prove each of the three factors. Therefore, if the employer fails to prove any one of the factors, the worker is considered an employee. The ABC Test condenses several parts of the Borello test by elevating one of the secondary factors, “Whether or not the work is a part of the regular business of the principal or alleged employer” from a consideration to a mandatory finding.
In the early days after this ruling, it is still unclear how each of these three factors will be implemented in practice, particularly across varying types of businesses and industries. Nevertheless, the ABC Test makes the use of independent contractors difficult if not impossible. People who were independent contractors under Borello are unlikely to be independent contractors under Dynamex.
While the case will have a sweeping impact across a wide array of business sectors in California, it should be noted the case itself restricts its ruling to California Wage Orders. The Court has, for the time being, left open whether this test applies to other circumstances and laws.
However, it is clear that going forward any employer seeking to hire independent contractors must be aware of the Dynamex decision and be prepared to meet all three factors of the ABC Test. Employers must be diligent in reviewing their practices with respect to independent contractors and, particularly given the recency of the decision, reviewing these practices with an experienced employment attorney is the best bet for any employer.