New California Independent Contractor Standard Complicates things for Employers

Employers have long used independent contractors for a variety of means. Perhaps your business has a project-specific job set to run a fixed length of time that can only be done by a specific type of individual, who you will not need after the job is done. Perhaps your business likes to substitute contractors for employees to avoid the administrative hassles involved in hiring employees and paying the associated payroll taxes that go along with their employ. One of the foregoing situations is an appropriate use of a contractor, the other is not. In a new California Supreme Court decision, the state’s highest court has added some clarity as to when and how an individual can be classified as an independent contractor.

When employers misclassify employees as independent contractors, they can be liable for significant overtime penalties, but also for denied benefits (given to regular employees) and other significant exposure that can make a seemingly small problem a big mess. In Dynamex Operations West v. Lee, the California Supreme Court set forth a new standard known as the “ABC” test for properly classifying a worker as an independent contractor. While “ABC” sounds simple, make no mistake, this new standard will make it much more difficult for California employers to prove that someone working for their business was an independent contractor and not an employee.

The ABC Test

The ABC test presumes employment under the California wage and hour laws unless a business can prove that all of the following conditions are met:

Factor A

Factor A requires the business must not dictate the control and direction of the employee’s work. This means contractors must be free to set their own hours and totally come and go as they please. Many companies run into problems with this step when they require contractors to be involved in regular or semi-regular meetings, for example.

Factor B

Factor B requires the entity to prove that the contractor’s services are outside the usual course of the entity’s business. The best example of this is an accounting firm who needs someone to cut the grass outside their building once a week. Such work would not fall within the purview of accounting, and therefore would pass factor B. Alternatively, where a tech company hires a contractor to do some coding on a website for its client it is a lot more difficult to prove the work was outside the usual course of the tech company’s business.

Factor C

Finally, factor C requires a business to prove the existence of a contractor’s independent operation such as a business license, tax identification, incorporation, and work for other customers or clients.

When taken in conjunction you can see that California has done its best to do away with the use of independent contractors. If you have employees in that state we strongly encourage you to contact Syntrio today to schedule a demonstration of our California wage and hour training. Further, no matter what state you may operate in, it would be of great benefit for you to review your policies and procedures, as the use of independent contractors as a substitute for employees has fallen further out of favor under the federal scheme as well.

Syntrio is a leader in the human resources and employment law fields (as well as ethics and compliance) and is prepared to help your company implement a compliance program aimed at reducing the potential impact of harassment, discrimination and other employment law issues your organization may face. Syntrio takes an innovative philosophy towards employment law training program design and strives to engineer engaging, entertaining, and thought-provoking content


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Written by, Jon Gonzalez, Esq., Chief Counsel for Syntrio


Posted in Code of Conduct, Compliance Training, Ethics, Managing Within the Law and tagged , , , , , .