Misclassification of employees as independent contractors has been a large source of wage and hour litigation in California. However, the rules to determine whether a worker is truly an independent contractor have been nebulous. It has allowed many businesses to engage in a gig economy where they classify workers as independent contractors despite such workers engaging in the work of their employers or performing similar work to those workers the employer has classified as employees. Thus, companies such as Uber and Lyft, have been able to avoid classifying drivers as employees depriving the drivers of employment benefits and protections under wage, hour and work safety laws.

On April 30, 2018, the California Supreme Court in Dynamax Operations West, Inc. v. Superior Court changed the rules when it comes to designating a worker as an independent contractor. The Court adopted a three part “ABC” test to determine whether a worker is truly an independent contractor or an employee for the purpose of wage, hour and work safety laws. Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes:

1. 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 such work and in fact;
2. that the worker performs work that is outside the usual course of the hiring entity’s business; and
3. that 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.

Under this test it is virtually impossible to support designation of a worker as an independent contractor if the worker performs work that is your business’ core work. Thus, stay at home seamstresses who make clothing for a clothing manufacturer are employees not independent contractors; bakers are employees of a bakery, not independent contractors; and, most likely (but, still to be determined on a case by case basis), Uber and Lyft drivers will be found to be employees, not independent contractors.

With this seismic change in the way California will classify workers an onslaught of employment litigation over misclassification can be expected and it is not without substantial risk to employers. In California, workers can bring PAGA claims for all similarly situated workers of the employer and, if successful, recover attorneys’ fees, substantial penalties and damages. In addition, the U.S. Department of Labor, California Departments of Industrial Relations and Labor Standards Enforcement are
expected to bring regulatory claims against employers who may misclassify workers with renewed vigor.

It is imperative that California employers re-evaluate their classification of workers and, in some cases, compensate misclassified workers for losses incurred due to misclassification. These new classification rules make it essential that businesses work with their legal counsel to rectify past misclassification and ensure that workers are not misclassified under the new rules.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.