Q. I own a small gym and proudly offer the largest variety of work out classes in town. I operate the gym by contracting with individuals experienced in the various classes my gym offers. These instructors select their own class material to teach and set their own class schedules. I previously met with an attorney to ensure that the these instructors were properly classified as independent contractors, and not employees. Can I continue to rely on the opinion that my business model satisfies the California independent contractor standard?
A. Unfortunately for California business that operate by using independent contractors, the California Supreme Court recently restructured the independent contractor standard, referred to as the “ABC Test” and it is much less flexible than the previous balancing test established in Borello.
On April 30, 2018, the California Supreme Court issued its ruling in Dynamex Operations West, Inc. v. Superior Court, completely overhauling (but not overruling) the independent contractor standard previously set forth in the seminal case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341.
The Supreme Court ruled that the test for determining the proper classification of an independent contractor requires a hiring entity to establish all of the following factors: A) 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) The worker performs work that is outside the usual course of the hiring entity’s business; and, C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Part A: Free From Control and Direction
This prong looks at the degree of control the company has over the individual. If the individual is subject to the same type of control a business typically exercises over employees, then the individual is not an independent contractor. For example, setting the person’s schedule, dictating the way in which the person performs the work, or the location of the work is performed would . Prior to Dynamex, this was the principal factor considered in the Borello balancing test. Now, it is considered equally as important as prongs B and C of the ABC test.
Part B: Outside the Usual Course of Business
This prong requires the individual to perform a type of work that is outside of the company’s ordinary business, i.e., is the individual performing a service for the company, or would the individual be viewed by others as an employee of the company. This prong is a significant deviation from the Borello standard and as a practical matter will prevent the use of independent contractors for most companies, except where the person’s work has no tangible connection to the hiring entity’s business. The Dynamex case uses the example of a retail store that uses the services of a plumber – the plumber is an independent contractor – versus a clothing manufacturer that uses a work-at-home seamstress, or a bakery that uses cake decorators, both would be an employee under the ABC Test.
Part C: Independent Trade
This prong requires that the individual is engaged in its own independently established business, rather than being a person assigned the independent contractor status by the company. Dynamex held that this requirement could be satisfied by showing the individual markets their own business and such as obtain their own business license, and performing their service for multiple entities.
Notably, the new ABC Test only applies to Industrial Welfare Commission Wage Orders. The California Supreme Court did not make any rulings about whether this test would also apply to other wage and hour laws, such as claims for reimbursement for business expenses, workers’ compensation or unemployment, but the opinion suggests such laws will remain subject to the Borello standard (click here to see our July, 2015 blog post about NFL cheerleaders for a summary of Borello standard/balancing test factors).
In sum, those California businesses using independent contractors should review these relationships to make sure they comply with the new standard, and be sure the answer to all three parts of this new test is “yes.” As always, the employment team at Baker Manock & Jensen would be happy to assist your business with any questions or concerns this new test might bring.