California Supreme Court Spells Out the ABCs of Gig Economy Worker Classification

In April 2018, the California Supreme Court issued an important ruling on how to determine whether workers are employees or contractors. While it is tempting to want to classify as many workers as possible as contractors, employers must take care to follow the new classification guidelines, which now place greater burdens on them to treat workers equitably.

Classifying workers as independent contractors rather than employees means that companies can avoid paying overtime, meal breaks and employee benefits. Companies like Uber and Lyft have built billion-dollar business models on contract employees. But workers are challenging these classifications, especially in cases in which the employer has a high degree of control over the worker and how she or he manages his day and workload.

The court established what is being called the “ABC test” in Dynamex Operations West v Superior Court, tightening the rules on employers. Employers need to understand both the basics and the details to properly manage their workforce and avoid running afoul of the law.

Under the ABC test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes:
(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such 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 for the hiring entity.

What does this mean? It means that courts are looking beyond how companies classify their workers to set more strict standards for employers about when contractors are actually employees, to whom wage and hour laws then apply. Courts are recognizing that workers have less sophistication and bargaining power in the employer/employee relationship. Therefore, companies now have the burden of proving that workers are contractors, running their own businesses, if they want to declare them contractors.

Smart companies will consult legal counsel to review all their employee classifications, to ensure that they are in compliance with these new, tougher standards.