On April 30, 2018, the California Supreme Court clarified the landscape for California employment law. The Court announced a new three-pronged “ABC” test which must be used to determine whether a worker is an independent contractor or an employee. The impact of this new legal framework is immediately clear for the gig economy but its reverberations will be felt throughout the California economy. Dynamex Operations West, Inc. v. Superior Court involved a dispute between delivery drivers and a nationwide package and document delivery company. The drivers alleged that they had been misclassified as independent contractors when they should have been employees. After winding its way through the court system for nearly twenty years, the California Supreme Court ultimately sided with the drivers when it announced the new “ABC” test. California law assumes that workers are employees. The burden of proving that the workers qualify as independent contractors fall on the employer. Under Dynamex, an employer must show three things in order to classify a worker as an independent contractor. The hiring entity must establish all three of the following factors:

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.

In analyzing the three prongs of the “ABC” test, it is clear that the second prong will be the most difficult for employers to satisfy. The Court reasoned by analogy that when a retail store hires a plumber or an electrician to perform work that worker would clearly qualify as an independent contractor since plumbing and electrical work are outside the usual course of its business. Conversely, if a clothing manufacturer hires a work-at-home seamstress to create articles to be sold at its stores, the seamstress would be categorized as an employee.  Within days after Dynamex’s publication, workers classified as independent contractors filed putative class actions against Lyft and Postmates alleging misclassification. Only one month later, San Francisco City Attorney Dennis Herrera issued subpoenas to Uber and Lyft demanding information on how the ridesharing companies classify their workers. The new state of the law will also have wide-ranging implications for other business types that have traditionally classified their workers as independent contractors.

After Dynamex, California employers will find it even more difficult to classify their workers as independent contractors. Previous interpretations of California’s employment laws focused on a more expansive list of factors, including those utilized in the “ABC” test, which could be given more or less weight depending on the circumstances. Employers did not need to meet every one of the previous factors. The new test under Dynamex is simpler and more predictable.

Those employers who have not revisited their classification procedures since the Dynamex opinion should talk to competent employment counsel. Companies that misclassify their workers face significant risks which could result in substantial fines or penalties for past wages, overtime, rest breaks, employment tax, unemployment insurance tax, and attorneys’ fees. Plaintiffs’ attorneys see the Dynamex case as an invitation to bring individual claims and class action lawsuits based on misclassifications.