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The California Supreme Court has adopted a new three-part test to determine whether a worker is an independent contractor or an employee under California’s wage orders, which regulate wages, hours, and working conditions.  The highly anticipated ruling could have wide ranging effects for businesses operating in California and beyond, as companies try to navigate the new gig economy.

In Dynamex Operations v. Superior Court, the California Supreme Court announced in the wage order context, a new “ABC test”  that requires a company to establish three factors to show a worker is an independent contractor:

(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 such work and in fact;

(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 the work performed for the hiring entity.

The business has the burden to establish that the worker meets each part of the test.

A number of other states have adopted a similar ABC-test for determining whether a worker is properly classified as an independent contractor. Unlike in some of those other states, however,  a hiring entity in California cannot satisfy part (B) by merely showing that the worker performs work physically outside of the employer’s place of business. Rather,  the work itself must fall outside of the hiring entity’s usual course of business.

For nearly 30 years  prior to this decision, California courts had used a multi-factor analysis first described by the California Supreme Court in S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal. 3d 342 (1989), for determining whether a worker should be classified as an independent contractor or an employee.  Under the former Borello test, the primary consideration in determining if an employment relationship existed was whether the company had the right to control the manner and means by which the worker performs the work. The Borello analysis also considered various secondary factors, including the degree of skill required to perform the work, the method of payment, and the nature of the company’s regular business. Importantly, the California Supreme Court expressed no opinion as to whether the Borello factors still apply to claims brought under the Labor Code (e.g., claims for unreimbursed business expenses) as opposed to claims brought under the Wage Orders.

At issue in Dynamex was whether individual delivery drivers were properly classified as independent contractors and whether the trial court had erred by certifying this question for class treatment.  The drivers claimed that Dynamex’s alleged misclassification of its drivers as independent contractors led to Dynamex’s violation of the provisions of California’s Industrial Welfare Commission Wage Order No. 9, the applicable state wage order governing the transportation industry, as well as various sections of the Labor Code.

The trial court ultimately certified a class action and rejected Dynamex’s contention that in the wage order context, as in most other contexts, the multifactor standard set forth in Borello was the appropriate standard for distinguishing employees and independent contractors.

Ultimately, the Supreme Court agreed with the lower courts that the ABC test best distinguishes employees from independent contractors.  While the Court found the lower court had applied too broad an interpretation of the ABC test, the Court nonetheless upheld certification, finding that the resolution of parts (B) and (C) of the test, under the particular facts presented, raised common issues capable of class-wide resolution.

In light of this decision, companies operating in California should review their classification of workers as independent contractors under the new test.