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California Supreme Court Adopts ABC Test Broadening Definition of Employee

Compliance
Article
05/17/2018
  • The California Supreme Court has ruled in Dynamex Operations West, Inc. v. Superior Court to adopt a three-prong test to determine worker status for purposes of coverage under applicable wage orders.
  • The three-prong test, or ABC test as it is commonly known, presumes workers are employees of the hiring entity, subject to the business’s ability to show otherwise by demonstrating the worker meets all three conditions under the test.
  • The ruling is likely to have an impact on the classification of workers for gig economy businesses in California.

The California Supreme Court has ruled in Dynamex Operations West, Inc. v. Superior Court to uphold a lower court's decision to adopt the Industrial Wage Commission's broad definition of employee when determining the status of workers for purposes of coverage under the state’s wage orders.

The California Supreme Court's decision adopts a three-factor test — the ABC test — which presumes workers are employees of the hiring entity unless a business can prove they meet the criteria under all three prongs to be classified as independent contractors. Since 1989, the state's courts have relied on the more flexible worker classification standard of the common law right-to-control test.

Three-part test determines worker status

The ABC test, adopted in the Dynamex Operations West, Inc. v. Superior Court case, considers only three factors which must be met to prove the worker is not an employee.

(A) 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; and

(B) The worker performs work that is outside the usual course of the hiring entity's business; and

(C) 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 court found that where the employer is able to establish that a worker meets the criteria under the ABC test, the worker is not an employee to whom a California wage order would apply 

Impact on gig economy

This long awaited and landmark ruling may have a significant impact on California businesses in the gig economy, a segment of the labor market built on on-demand workers, especially those secured through apps. That impact may likely include an increase in legal challenges by California gig workers currently classified as independent contractors as well as an uptick in legislation introduced affecting specific industries including ridesharing.

In general, the new test adopted by the courts is expected to result in an increase in the number of California workers eligible for worker protections under the wage orders, including minimum wage, overtime, rest breaks, and other benefits. Employers are encouraged to take proactive steps to enlist the assistance of an HR professional or legal counsel to help them to assess whether they may have workers who may be misclassified in consideration of this recent court decision.

Tammy Tyler

Tammy Tyler is a senior compliance analyst with a focus on employment law at Paychex, Inc., a leading provider of integrated solutions for payroll, HR, retirement, and insurance services.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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