Compliance Corner: Worker Classification in the Gig Economy

Earlier this year, a California court ruling established a three-part test that provides the criteria an organization must meet for a person to be considered an independent contractor and not an employee.

The 7-0 ruling by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles laid out the following criteria to determine who may be classified as an independent contractor in cases involving minimum wage and overtime payments:

• (A) “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 such work and in fact;
• (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
• (C) that 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.”

In the ruling, if the worker does not meet all three criteria of the ABC test, then that worker is presumed to be an employee.

Previously, courts had relied on the decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations which adopted the “control-of-work” test that asks “whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.”

However, the court decided that the Borello test “makes it difficult for both hiring businesses and workers to determine in advance how a particular category of workers will be classified, frequently leaving the ultimate employee or independent contractor determination to a subsequent and often considerably delayed judicial decision.” The result of such circumstances “often leaves both businesses and workers in the dark with respect to basic questions relating to wages and working conditions that arise regularly, on a day-to-day basis.”

With the growth of the gig economy, this has significant implications for organizations in California that use independent contractors to provide a core product or service.

Organizations in California should evaluate whether any independent contractors need to be reclassified as employees.