California’s employee v. independent contractor Supreme Court decision

It is amazing that big companies (or at least their associations) have not done more during California’s current Legislative Session.  These corporate giants, whose investors and directors personally stand to lose so much, have not successfully put forth any legislative fix which seeks to reduce liabilities by clarifying employee versus independent contractor classifications in California.

On April 30, 2018, the California Supreme Court decided the Dynamex case upon a 3-part “ABC” test to determine the classification of employees versus independent contractors.  It would seem most, if not all, of a company’s agents are actually employees under this court decision, and now subject to payment of back-wages, over-time, benefits, and damages against any company which is guilty of misclassification.

The Dynamex ruling could be the biggest labor liability for California companies of our lifetime, and trial attorneys are salivating over the number of potential lawsuits in various industries.  Industries for insurance, real estate, investment, outside sales, trucking, personal transportation, deliveries, hair dressers, massage therapy, and more, all appear to be using independent contractors which are controlled like employees but improperly classified as independent contractors under the findings of this new ruling.  In that the Court decided it was clarifying existing law, lawsuits may reach back several years worth of employment.

The recent Dynamex case will gut many industries through lawsuits over incorrect classification of employees as independent contractors.

For decades California has had a “presumption of employee status” that the company must disprove through a series of determinations if it is to use independent contractors.  Under California law, every worker is assumed to be an employee unless the company can prove with “substantial evidence” that it has properly classified the worker as an independent contractor.  To add to this complication, it is not uncommon that California’s view of employee status conflicts with federal IRS determinations.

Nonetheless, since Plaintiffs attorneys file in California courts, it is expected that all three parts of the below ABC test should now be met by all California companies.

Part A – Is the worker free from control and direction under the contract and in fact?

Both manifest and latent control must match.  The company cannot merely say things are one way, but in practice they are another way.

If a company requires mandatory attendance of “independent contractors” at meetings which are not open to the general public, then that is one demonstrated form of control which favors employee status.

If a company provides the materials and direction in the use of those materials (brochures, forms, supplies, etc.), then there is another form of control.

If a company provides training on how to do things according to your company policy, then that is another form of control which favors employee status.

Part B – Does the worker perform work outside the usual course of the hiring entity?

The Dynamex Court determined that companies which depend upon independent contractors who act as sales agents for the company, are likely employees who have been misclassified.  The Court held a violation occurs when “all individuals who are reasonably viewed as providing services to the business in a role comparable to that of an employeerather than in a role comparable to that of a traditional independent contractor.

Any appeal to “tradition” (i.e. “that is how it has always been done”) no longer protects a company under this new ruling.  Additionally, companies which use a mix of employees or independent contractors who perform substantially similar primary tasks for the company, will very likely find themselves at risk of losing a complaint for misclassification of employees as independent contractors.

By example, a seamstress who is an “independent contractor” but who takes home the company-provide materials to make products for that company, is in fact an employee who has been misclassified.

Part C – Is the worker customarily engaged in an independently established trade or business?

Here, the hiring entity must prove the “individual independently has made the decision to go into business for himself or herself” (Dynamex at 74).  Can the individual work for other companies at the same time, and provide the same service as they do for your company?

The Court held that merely allowing the individual to work for others is insufficient evidence that the workers actually customarily engage in an independent trade or business.  Hiring entities have failed this part of the test when they were unable to prove, with evidence, that the worker had independent licenses, locations, phone numbers, advertisements, and so on.

Is your company’s “independent contractor” working under a company employee’s license?  Then the independent contractor is likely an employee who has been misclassified.

Is your company’s “independent contractor” working within a company office?  Then the independent contractor is likely an employee who has been misclassified.

In conclusion, there is no legislative “fix” in the works.  There are two weeks left in the Legislative Session, and there is still time to do, well, something.  Labor unions rule the Legislature, but if enough groups band together through a collaborative effort to clarify California law, then we can protect against the onslaught of misclassification lawsuits which are expected to bombard your company and industry in the near future.


The author of this article is not an attorney, and none of the contents of this general message are in any way intended to serve as legal advice.  The reader is encouraged to seek the advice of an attorney for any interpretation of law or advice with regards to the reader’s particular situation.  The reader is also encouraged to pursue a legislative fix, this year, to at least delay potential lawsuits until such time as a meaningful legislative fix to the ambiguity over employee versus independent contractor status is clarified.