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New California Rules Set For Determining Employee Versus Contractor

Palm Springs, CA – In a decision likely to make it much harder for businesses to classify workers as contractors, the California Supreme Court has set aside a multi-factor standard, which California courts used for 30 years to determine whether a worker was an independent contractor or an employee under the state’s various Wage Orders.

From now on, businesses must use a three-factor, or ABC, test when making that determination, based on the Court’s ruling on April 30 in Dynamex Operations West v. Superior Court of Los Angeles County.

How the New California Ruling Works

The test presumes the worker is an employee and not an independent contractor unless each of three conditions is satisfied:

(1) The worker is free from direction and control in the performance of the service, both under the contract of hire and in fact; and

(2) The worker’s services must be performed either (i) outside the usual course of the employer’s business or (ii) outside all the employer’s places of business; and

(3) The worker must be customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the service being provided.

Previous Ruling

Until this decision, California courts relied on a 1989 case, S. G. Borello & Sons, Inc. v. Department of Industrial Relations, citing factors such as the potential contractor’s investment in tools, the method of payment, the degree of permanence of the relationship, and the intention regarding the relationship when assessing whether a contractor or employment relationship existed.

California joins a handful of other states in having these so-called “worker friendly” ABC tests in their wage and hour laws, including New Mexico, Connecticut, Illinois, New Jersey and Massachusetts.

Business owners should be careful and consult experienced wage and hour counsel when classifying or reviewing the classification of workers in light of the Dynamex decision, which is complex and cannot be fully addressed in this space.  They can be held liable for unpaid wages, employee benefits and, if the misclassification is deemed, “willful” subject to statutory fines.

SBEMP has experienced Labor and Employment attorneys available to guide clients through the complex California laws affecting employers. Our experienced team has assisted clients with day-to-day personnel management issues and ensuring wage and hour compliance. We have experienced litigators who represent clients regularly in cases regarding labor and employment litigation.

For more information or to discuss Labor and Employment issues with one of our experienced attorneys, visit SBEMP at www.sbemp.com/practice-areas/labor-and-employment

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