California Supreme Court Drastically Cuts Classifying Workers As ICs

The California Supreme Court yesterday issued a decision that drastically cuts the types of workers who may be hired as independent contractors. See this LA Times article for a brief summary. Previously, California applied a multi-factor test that took a holistic view of a worker to determine if the worker qualified as an independent contractor or an employee. With the new decision, however, a hiring business must now show that its contractors meet each part of a strict three-part test — a test that for many businesses will be impossible to pass. In Dynamex Operations West v. Superior Court, the Supreme Court summarizes the test as follows:

“The [new] ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (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 the work and in fact; and (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 that involved in the work performed.”

Part b of the test, requiring that the contractor “perform work that is outside the usual course of the hiring entity’s business” is most problematic. As a practical matter, the law now prevents any business that provides a certain service from hiring independent contractors to assist in providing those services. For example, an HR consultancy firm can no longer hire HR consultants as independent contractors; a flooring business cannot hire installers as independent contractors; a tutoring business cannot hire tutors as contractors; a dog-walking business cannot hire dog-walkers as independent contractors; Uber and other ride-sharing companies cannot hire drivers as independent contractors. The list could go on: massage therapy businesses; barber shops; delivery businesses; roofing companies, general contractors; janitorial businesses; etc.

In sum, businesses will need to review their use of independent contractors and determine whether they can keep the classification. In many cases, they cannot.

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