California Supreme Court Decision Dynamex Creates Major Classification Changes for Independent Contractors

On April 30, 2018, the California Supreme Court issued a unanimous 82-page opinion in Dynamex Operations West, Inc. v. Superior Court. The ruling creates a new standard for California that presumes workers are employees instead of independent contractors.

Changes for Employers

As part of their decision, the Court adopted a new ABC Test that will determine—for wage order purposes—whether the hiring entity has engaged an employee or a contractor. The B qualification of the new test requires that the contractor performs work that’s outside the usual course of the hiring entity’s business.

This creates a challenging new standard for employers to consider when they’re hiring a professional to provide services to their company. 

Test Requirements

Under the new ABC test, the hiring business must demonstrate the worker meets all three of the following requirements:

  1. They’re 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. They perform work that’s outside the usual course of the hiring entity's business
  3. They are customarily engaged in an independently established trade, occupation, or business of the same nature as that which the hiring entity performs

Employee-Employer Relationships

The court provided the following examples of situations that would be deemed employee-employer relationships:

  • Work-at-home seamstresses hired by a clothing manufacturing company to make dresses from cloth and patterns that are supplied, and will be sold, by the company
  • Cake decorators hired by a bakery to work on a regular basis on custom-design cakes
  • A worker hired to cut and harvest timber by a timber management company that’s involved in the purchase and harvesting of trees and the sale of cut timber
  • A performer hired by a resort that advertises and regularly provides entertainment
  • An art instructor hired to teach art classes at a museum that offers art classes on a regular and continuous basis

We’re Here to Help

To discuss whether this development may impact your business and future hiring plans, contact a Moss Adams tax professional by emailing statetax@mossadams.com, or visit our tax controversy webpage.