Two recent important court cases have created uncertainty for California employers that rely on independent contractors for much of their workforce. The cases have arguably increased the potential liability for employers who have characterized certain workers as independent contractors when, according to the new rulings, they should have been characterized as employees. The distinction matters for a wide variety of reasons, because an employee is entitled to many rights and benefits that an independent contractor is not.
In 2018 the California Supreme Court departed from 30 years of precedent when it handed down its ruling in Dynamex Operations West v. Superior Court of Los Angeles, No. S222732 (Cal. 2018). The Dynamex decision established a new so-called “ABC test” that California courts will use to determine if an individual is correctly characterized as an independent contractor. According to the ruling, an independent contractor’s position within the employer’s business must have three characteristics:
- The worker must be free from control and direction in how to perform the work.
- The worker performs work that is outside the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade or profession of the same nature as the work being performed for the hiring entity.
Part B of the ABC test has received a lot of attention. The plaintiffs in Dynamex were drivers who had been characterized by the defendant business as independent contractors. In part because the drivers did the same type of work as the employer company, the ruling held that the drivers were entitled to benefits reserved for employees, like overtime pay and workers’ compensation coverage.
Following Dynamex, the federal Ninth Circuit Court of Appeals applied the ABC test and went a step further, holding that the ABC test should be applied retroactively. Vazquez v. Jan-Pro Franchising, No. 17-16096 (9th. Cir. 2019). Some commentators think that the Jan-Pro decision has opened up a potential floodgate of litigation as workers who have been characterized as independent contractors under the standard that existed prior to Dynamex will now retroactively make claims for employee benefits.
California nonprofits that use independent contractors for some or all of their operations will need to re-examine their contractor relationships closely in light of these new standards. Old contracts may not fully anticipate the ABC test. Future contracts will need to be evaluated in light of the potential risk, with an eye toward complying with the difficult standards set in Dynamex. Although the California legislature has taken up dueling proposals that may alter the rules in the state further, for now the Dynamex standard should guide management decisions.
The Church Law Center of California is following developments in the Dynamex rules. We can help religious and secular nonprofits make sense of their obligations and plan for addressing limitations in their existing agreements. Call us today at (949) 892-1221 or reach out to us through our contact page.