US Corporate Law News: California adopts new test to classify workers as independent contractors or employees

On April 30, 2018, the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles adopted a new test, best described as the “ABC Test”, to determine whether a worker should be classified as an independent contractor or an employee. The ABC Test is adopted in connection with multiple state unemployment insurance laws, and more broadly in certain other jurisdictions, such as Massachusetts and New Jersey. The ABC tests has a rebuttable presumption that individual service providers are employed by the hiring entity, unless all three of the following elements can be proved, including: (1) the worker is free from the control and direction of the hiring entity (both under contract for the performance of the work and in fact); (2) the worker performs work that is outside the usual course of the hiring entity's business; and (3) the worker is customarily engaged in an independently established trade, occupation or business. Consequences of misclassification liability continue to be significant, as employers may be exposed to costs associated with assessments for unpaid payroll taxes and penalties, worker claims for back pay and penalties for unpaid overtime; but more significantly, employers may also be exposed to vicarious liability when former independent contractors are reclassified as employees with an accompanying agency relationship to the employer. For more information, see Dynamex Operations W., Inc. v. Superior Court, No. S222732, 2018 Cal. LEXIS 3152.