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California Supreme Court Brings Substantial Change to Employee/Independent Contractor Classification

By Jessica L. Mackaness, Esq. of Shustak Reynolds & Partners, P.C. posted on Tuesday, May 22, 2018.

On April 30, 2018, the California Supreme Court issued its long-awaited opinion in Dynamex Operations West, Inc. v. Superior Court, which significantly changed the standard for determining whether workers in California should be classified as “employees” or as “independent contractors” for purposes of the wage orders adopted by California’s Industrial Welfare Commission.  

The decision established a presumption that every worker is an employee, and that an entity classifying a worker as an independent contractor bears the burden of establishing that such a classification is proper.  To determine whether that burden has been met, the California Supreme Court adopted the “ABC test,” which is used in other jurisdictions.  In order for a worker to be classified as an independent contractor under the ABC test, the hiring entity must establish each of the following three factors:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the 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.

The Dynamex decision marks a significant departure from other courts nationwide that, in recent years, have narrowed the definition of “employee,” rather than expanding it.

Following Dynamex, employers are likely to see fresh challenges by current and former workers contesting their classification as independent contractors.  If a worker should properly be classified as an employee, the employer bears the responsibility for paying federal Social Security and payroll taxes, unemployment insurances taxes and state employment taxes, providing workers’ compensation insurance, and complying with federal and California regulations governing the wages, hours, and working conditions of employees. 

Both hiring entities and independent contractors alike are encouraged to review their current contracts to ensure they meet the requirements of the new “ABC test.”

Shustak Reynolds & Partners, P.C.  focuses its practice on securities and financial services law and complex business disputes.  We represent many broker-dealers, registered representatives, investment advisors,  investors and businesses.  For more information, contact Erwin J. Shustak, Managing Partner [email protected], or call 800.496.5900 ext. 109.

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