California Supreme Court Adopts "ABC Test" for Independent Contractors

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The Court concluded that the "suffer or permit to work definition is a term of art that can not be interpreted literally in a manner that would encompass within the employee category the type of individual workers. who have traditionally been viewed as genuine independent contractors who are working only in their own independent business".

The California Supreme Court set more stringent standards for determining whether workers can be classified as independent contractors, handing a victory to worker advocates and dealing a setback to gig economy companies and platforms.

Under the previously used "control-of-work-details" or "economic reality" test to determine independent contractor or employee status, courts (and hiring entities) looked to the nature of the work performed, the overall arrangement between the parties, and the goal of the applicable statutes, among other things. While the Court's decision will likely have its biggest impact on the state's growing "gig economy" - a topic we have recently addressed more broadly - it will also extend to almost every company that engages independent contractors in California. For instance, Chief Justice Tani Cantil-Sakauye said, a store that hires a plumber to fix a leak is hiring a contractor, but a clothing maker that hires seamstresses to work at home must pay them as employees.

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The court held that the businesses that misclassify employees as contractors gain an unfair competitive advantage over competitors that strictly follow the rules. Plaintiff, a Dynamex driver classified as independent contractor, alleged that Dynamex improperly classified its drivers as independent contractors instead of employees, depriving those drivers of the protections provided by the California Labor Code and applicable wage order.

The ruling threatens to send shock waves through the so-called "gig economy," which grew in the years following the Great Recession. But she ruled in favor of the company, concluding that it did not exert sufficient control over the worker to be considered an employer. It remains to be seen exactly how the court ruling affects these companies and their drivers.

The Internal Revenue Service (IRS) has noted that telling an employee from an independent contractor is not always easy, saying it often depends on the facts in each case.

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But he cautioned that cases would have to be decided on an individual basis.

The IRS says the critical factor is whether the employer "has the legal right to control of how the services are performed".

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