The California Supreme Court recently adopted the “ABC” Test to determine whether a person is an employee versus an independent contractor. The classification of an individual performing services for an operating company has long been an area of ambiguity and contention. Oftentimes, an employer may want to classify a new hire as an independent contractor. Oftentimes, an employee may want to be classified as an independent contractor. The critical hot buttons at issue with the classification are tax withholdings, tax deductions, eligibility for overtime, meal breaks, rest breaks and qualification for benefits.
The ABCs of the Dynamex Decision:
The California Supreme Court adopted the ABC test to determine whether an employee is an independent contractor. As the Court wrote: “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”
Applying the ABC Test:
The burden of proof is on the employer (i.e. the “hiring entity”). That means, if the classification is challenged, then the courts will start with the presumption that the individual at issue is an employee, and the employer will have to prove that the relationship passes the ABC test. Prongs “A” and “C” of the test can usually be satisfied with some planning and controls. However, we believe that “B” will prove to be very challenging for many companies or independent contractors.
How Do You Manage the Risk?:
Business and life is about risks, mitigating risks and managing risks. Litigation arising from misclassification is one of those risks. The first approach a company (or contractor) can take is to set up the work relationship as an employer-employee relationship. The second approach would be to set up the relationship as an independent contractor relationship after running through the test with your legal counsel, and with full appreciation of the risks of misclassification in financial terms. The third approach is to search for insurance to cover this risk. At the present time, we are not aware of any, but new products are being created all the time, so we recommend that employers revisit this issue with their insurance brokers periodically.
About Adishian Law Group, P.C. Adishian Law Group (http://www.AdishianLaw.com) is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. As of December 2016, the firm has represented corporate and individual clients located across 22 California counties, 13 States outside of California and 10 foreign countries in over 520 legal matters. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco.
For more information about this case, contact Chris Adishian: