On the eve of International Workers’ Day (worldwide on the first day of May), a unanimous California Supreme Court issued a potentially far reaching opinion threatening the very underpinnings of the so-called “gig economy” brought on by Silicon Valley companies like Uber, Lyft, and a host of others.  Claims by workers that they have been improperly cast as independent contractors, and not as employees, have worked their way to the top of California’s judicial system.  This decision applies to most employers and it basically presumes  employee status unless the employer disproves the new 3-prong test.

A same-day package delivery company called Dynamex, which had treated its drivers as employees prior to  2004, converted those jobs into an independent contractor position, and former employees sued in a hotly contested class action.  In ruling in the drivers’ favor, the California Supreme Court scrapped the historic test for who is – and who is not – entitled to be correctly considered an independent contractor.  That ruling also threw a wrench into the gears of start-ups trying to disrupt the traditional employer-employee relationship.

In its exhaustive 82-page decision in Dynamex Operations West, Inc. V. Superior Court,  the California Supreme Court replaced the historic multi-part analysis of when a person could be deemed to properly be classified as an independent contractor with a newer and simpler test.  Bottom line: a win for workers, and a potential sea change placing employers at heightened risk.

This new decision explored the complex and sometimes convoluted analyses of this question in other California cases and cases from other state and federal courts.  Although this ruling was within the narrow confines of a question as to class certification, its fundamental holding will surely apply to numerous other business decisions affecting independent contractor disputes.

As the high court put it, “if a worker should properly be classified as an employee, the hiring business bears the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and, most relevant for the present case, complying with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees.  The worker then obtains the protection of the applicable labor laws and regulations.  On the other hand, if a worker should properly be classified as an independent contractor, the business does not bear any of those costs or responsibilities, the worker obtains none of the numerous labor law benefits, and the public may be required under applicable laws to assume additional financial burdens with respect to such workers and their families.”

California now follows the “ABC” standard a few other states had earlier adopted to answer this inquiry.  “Under this 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.”

This decision shifts the burden to the employer for all three elements of the new test.  In many if not most scenarios, the employer may not be able to meet this new test. If you have questions on how this game-changing opinion may affect you, please feel free to contact us.