Earlier this year, the California Supreme Court adopted a stricter test for determining who is an independent contractor, and executives say the decision in the case, known as the Dynamex case, will have a significant impact on companies that use independent contractors — especially online gig economy platforms with independent contractor models — and the full impact of the ruling is still building.
Pablo Orozco, an attorney with the law firm Nilan Johnson Lewis, says it was a closer call as to whether a worker was an independent contractor under the previous test used by courts in the state.
“The ABC test the Dynamex court endorsed is a more stringent test than the one that was used most often previously,” Orozco says. “That is going to make it very difficult for some companies to justify under the law their workers as independent contractors.”
Workers are presumed to be employees under the new standard; the burden is on companies to prove the workers are independent contractors.
Orozco says cases are already being filed under the new test. For example, the gig economy sector breathed a sigh of relief when a court found drivers for restaurant delivery platform Grubhub were independent contractors, not employees. But that ruling came before the Supreme Court’s action. Now, drivers’ attorneys in the case have asked the Ninth Circuit Court of Appeals to remand the case back to district court so that it can reconsider its ruling in light of the Dynamex decision.
“The district court in its decision finding that plaintiff was an independent contractor rather than an employee did not perform the analysis that Dynamex requires,” according to a court filing by drivers’ attorneys. “And notably, the district court’s finding that plaintiff performed a service within GrubHub’s usual course of business — food delivery — though just one of the factors under the multi-factor Borello test, will be dispositive under the ABC test.”
According to the Supreme Court’s opinion in the Dynamex case, the ABC test presumptively considers all workers to be employees. Workers can only be classified as independent contractors if all these conditions are met:
(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.
The previous test, which had been in use since 1989, included 11 points, and judgments on proper classifications were made based on weighing the facts and circumstances. For an independent contractor finding under the new ABC test, all three parts must be applicable to the worker, says Gene Zaino, president and CEO of MBO Partners, which works with companies to engage and manage independent contractors on a compliant basis as well as provides back-office services to independent contractors.
The “B” portion of the ABC test is particularly nettlesome, he says.
“It’s going to make it very difficult for people working in California to be classified as an independent contractor,” Zaino says. “If they are doing similar work that is within the usual course of their client’s business, it will be difficult for them to not be found employed by somebody.”
For plumbers or house painters, the law isn’t a problem. But the court’s decision is a significant event for large business.
Zaino noted it will affect contingent workforce users outside of California if they have independent contractors residing in that state. Most other states don’t have as strict a law for IC misclassification, although Massachusetts also uses the ABC test.
Jason Posel, co-founder and CEO of Greenlight Workforce Solutions, which provides independent contractor compliance services, says the court’s decision will also affect small and midsize firms that use independent contractors. A design studio, for example, might use independent contractors to manage some of their deliverables, and this use case could be affected by the new test.
Companies need to validate that every independent contractor they use is not misclassified, Posel says. A worker may prefer to be an independent contractor for financial, ego or other reasons, but correct classification isn’t up to the individual or company.
However, companies can still engage independent workers. “You can still use a freelancer, it just might mean you need a third party to employ them,” he says.
Amar Panchal, CEO of IT staffing firm Akraya, says says his Sunnyvale, Calif.-based firm opted not place independent contractors starting about five years ago as a way to help mitigate risks for its clients, long before the court ruling.
“One of the biggest values we bring to our enterprise customers is reducing risk,” Panchal says. “We consciously decided we would avoid the use of independent contractors.”
Panchal also says he sees that companies have been decreasing their use of independent contractors.
“Most large companies have started putting it in our contract that [we] will not use independent contractors,” he says.
There are still people who want to be independent contractors, but Panchal says he sees few people who are only open to being an independent contractor and not a W-2 worker.
What Is Next?
Orozco says he wouldn’t be surprised if the plaintiffs’ bar was already trying to figure out what industries are no longer in compliance under the Dynamex ruling. And cases are already being filed.
The Dynamex decision is now the law of the land in California. The state legislature could change it, or the test could be changed by regulation — but neither of those scenarios is likely.
“What’s most likely to happen is for courts and the parties to make arguments, find carve-outs, find exceptions, find some additional areas in which it’s not applicable,” Orozco says, but that will be tough to do.
“The advice we give our clients is figure out how you’re using independent contractors,” he says. Then they can look at risk, and there are some ways to mitigate that, such as agreements that call for individual arbitration.
However, for some firms whose business model relies on independent contractors such as human cloud/ride-sharing firms, things could get difficult.
And this is focused on California; things can go differently in other states. For example, in a decision released on June 21, independent contractor couriers for app-based delivery service Postmates were found to be independent contractors by the New York Supreme Court, Appellate Division, Third Department.