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Are you in Compliance Today? California Supreme Court Adopts New Test for Independent Contractor Status

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Are you in Compliance Today? California Supreme Court Adopts New Test for Independent Contractor Status

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Originally published on the Hackler Flynn & Associates website.

Compliance Concept. Word on Folder Register of Card Index. Selective Focus.On April 30, 2018 the California Supreme Court issued an opinion that makes California one of the least hospitable jurisdictions in the nation for utilization of independent contractors. As a result, many companies that were in compliance with the labor laws in California related to independent contractors yesterday may be out of compliance today.

The ruling came in a case originally filed in Los Angeles County Superior Court by a worker named Charles Lee. Lee claimed that Dynamex Inc. improperly classified him as an independent contractor. The case drew attention from the media and legal minds alike because it involved the hot-button issue of independent contractor versus employee. The distinction is that an employee is subject to wage and hour laws and entitled to benefits such as workers’ compensation.

Until yesterday, the general test for determining whether a worker could be properly classified as an independent contractor involved a number of factors which focused primarily on the degree of control that the company had over workers, but no one factor was determinative of independent contractor status.

In its 82-page decision, the California Supreme Court rejected the continued use of its well settled multi-factor test in favor of a more rigid “ABC” test. The new test presumptively considers all workers to be employees, and permits the classification of a worker as an independent contractor only if the hiring business satisfies the following conditions:

  1. That 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 the work and in fact;

  2. That the worker performs work that is outside the usual course of the hiring entity’s business; and

  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Businesses operating in California will need to reevaluate their use of workers classified as independent contractors and, if needed, quickly restructure the business and relationships to comply with this decision. 

Cindy Flynn

Author:

Cindy Flynn

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This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal, and accounting advisors, and you should consult with a tax, legal and accounting professional before engaging in any transaction.