SAN FRANCISCO — A recent decision by the California Supreme Court may pose new litigation risks for companies by changing the way the state defines employees or independent contractors, according to Richard Reibstein, an attorney with Locke Lord and co-head of the law firm’s independent contractor compliance practice.
Specifically, the high court changed the test that determines whether an individual is an employee or an independent contractor.
“The test has dramatically changed," Reibstein told the Cook County Record. "No longer is it a multi-factor test where no one factor is determinative, now it’s a rigid three-factor test where each factor can be determinative. A failure to meet any one of the tests by the company results in the individual becoming an employee instead of an independent contractor.”
Richard Reibstein, Partner at Locke Lord LLP.
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According to the high court's decision, the new test requires that all three of the factors be proved, including “(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 the 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 that involved in the work performed.”
The Supreme Court's decision was made in an appeal filed in Dynamex Operations West Inc. v. the Superior Court of Los Angeles County. Dynamex is a delivery company that classified its drivers as independent contractors. It had claimed that it did not need to comply with elements of the California wage orders.
Previously, California had used a multi-factor model from a 1989 California Supreme Court decision that focused on the company’s control over the worker.
“Because this is a dramatic change in law, most companies using independent contractors in California will need to reevaluate whether they’re doing it correctly," Reibstein said. "This applies to businesses of every industry. There are no exceptions.”
Reibstein said that Illinois should not be affected, as it “is one of the states that has a similar test to the one that California adopted.”
Considering the California high court's decision, Reibstein said that companies may need to change their process when classifying workers as independent contractors or employees.
“Companies that use independent contractors in California need to reevaluate whether they meet the new test or whether they need to restructure their relationship with their independent contractors,” he said.