California Supreme Court Ruling Makes Independent Contractor Classification More Difficult

The California Supreme Court has made an important change to employment classification law for California employers, that will make it more difficult for companies to appropriately classify workers as independent contractors.

The new "ABC" standard is simpler but more strict than the prior classification scheme. In order for the company to properly classify a worker as an independent contractor, the company must prove the following (note that the burden is on company seeking IC treatment and if the burden is not met, the worker is an employee, the criminal law equivalent of "guilty until proven innocent"):

A - that the worker controls his or her work,

B - that the duties go beyond what the business normally does, 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.

Any of these can derail a would-be independent contractor relationship, but it is the second of these prongs - the "B" in "ABC" - that will be perhaps the most difficult for many California companies including ride-sharing services that claim all drivers are independent contractors.

Whether Uber and Lyft, who have just received subpoenas for more information from the California Attorney General, will be able to argue they are in the business of providing a mobile app, rather than actual transportation, remains to be seen. If not, their business model will need to change dramatically, at least in California.

Companies whose consulting arrangements with ICs previously may have passed muster may find themselves unable to show that the pre-existing relationship still qualifies under the new ABC standard and are well advised to have a business and employment law attorney review the circumstances and agreement and then implement any needed changes.

The case is Dynamex Operations West, Inc. v. Superior Court, County of Los Angeles, Supreme Court of California, No. BC332016, April 30, 2018.

In 2012, a California law went into effect providing for additional civil penalties for wilfully misclassifying workers as independent contractors of $5,000 to $15,000 per violation.

Update: On January 1, 2020, AB 5 became law, which essentially codified Dynamex into statutory law.