May 2018 HR Bulletin: Will Your Independent Contractors Pass the ABC Test?

May 2018 HR Bulletin

Will Your Independent Contractors Pass the ABC Test?

On April 30, 2018, the California Supreme Court issued an opinion that could have significant impact on a business’s ability to hire workers as “independent contractors.” The case, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, tackled the question of whether a nationwide delivery company had misclassified delivery drivers as independent contractors, unlawfully avoiding responsibility for overtime and other wage and hour protections.

In its decision, the Supreme Court adopted a more structured process than the multi factor approach used in the past, referred  to as the “ABC test” for distinguishing employees from independent contractors.

The ABC test begins with the presumption that all workers are employees and are covered by the protections of the Fair Labor Standards Act and applicable IWC Wage Order(s). A person may be classified as an independent contractor only if ALL of the following conditions are met:

A)     Is the worker free from the control and direction of the company in connection with the performance of the work, both in contract and in fact?  Even a very minimal amount of control over the work product may be sufficient to fail this part of the test. In a 2007 Vermont case, a clothing manufacturer failed to establish that independent knitters were free from the company’s control even though they worked from home, on their own machines, and at days/hours of their own choosing. (Fleece on Earth v. Dep’t of Emple. & Training)

B)     Does the worker perform work that is outside the usual course of the hiring entity’s business? As examples, the Court contrasted a retail store hiring a plumber or electrician with a bakery hiring a decorator to work on custom-designed cakes. When the work being performed is comparable to that of employees, and the individual would normally be viewed by others as working in the hiring entity’s business, the relationship will likely fail this part of the test.

C)     Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed? In other words, does the person actually have his/her own business with associated licensing, advertising, etc. or is he/she simply an individual who agreed to forego the typical employer/employee relationship? The fact that a business does not prohibit a worker from engaging in such activities is not enough. For example, in a 1998 Virginia case, a construction company failed to prove that siding installers were independent contractors partially because “no evidence was presented that the installers had business cards, business licenses, business phones, or business locations.” (Brothers Const. Co. v. Virginia Empl. Comm’n)

Keeping in mind that all three factors of the ABC test must be satisfied in order to correctly classify a worker as an independent contractor, the somewhat-vague Part A regarding company control may not need to be analyzed at all. In its decision, the Supreme Court stated, “a court is free to consider the separate parts of the ABC standard in whatever order it chooses…. In many cases it may be easier and clearer for a court to determine whether or not Part B or Part C of the ABC standard has been satisfied than for a court to resolve questions regarding the nature or degree of a worker’s freedom from the hiring entity’s control.” This means that even if your business makes a concerted effort to be hands-off regarding how or when a worker gets the job done, if the person is performing work that is not distinctly different from your business, or if the worker has not established his/her own independent trade or occupation, the classification of independent contractor may be found unlawful.

If your company currently utilizes independent contractors, we encourage you to carefully examine the types of projects and assignments these workers are given. Would their work be perceived as being “in the usual course” of your business? Also consider whether each person is operating a truly independent trade or business, with the license and company structure to show for it. If you are not confident that these working relationships would pass the ABC test, you may wish to seek legal guidance to assess risk and determine next steps.