On April 30, 2018, the California Supreme Court substantially narrowed the class of individuals who qualify as independent contractors under California wage-hour law and paved the way for a new wave of class actions. In Dynamex Operations West, Inc., the Court adopted the restrictive “ABC test” used in other jurisdictions for determining when a worker qualifies as an independent contractor under California’s Industrial Wage Orders.

Under that test, the court presumes‌ all workers qualify as employees. A hiring entity can prove that the worker qualifies as an independent contractor only if it can show that the worker:

A) 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; and

B) performs work that is outside the usual course of the hiring entity’s business; and

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

The hiring entity must show all three criteria. Parts (B) and (C) impose particularly narrow constraints for companies seeking to hire independent contractors.

The Court clarified that a hiring entity cannot satisfy part (B) by showing that the worker performs work physically outside of the employer’s place of business, like in some jurisdictions that use the ABC test. The Court wrote: “In light of contemporary work practices, in which many employees telecommute or work from their homes,” the Court would go further and require that the work itself falls outside of the hiring entity’s usual course of business.

The ruling undoes the nearly 30-year old, multi-factor Borello test for evaluating an independent contractor/employee relationship, which closely resembled the “economic realities” test under federal law.

The ruling also calls into question numerous existing independent contractor relationships in California, exposing companies to liability and paving the way for new wave of wage-hour class actions by making it easier to establish commonality and predominance. Indeed, the Dynamex Court affirmed the trial court’s decision to certify a class action filed by Dynamex delivery service drivers, and Dynamex’s independent contractor model resembles the business model of many trucking companies and app-based service businesses. At Dynamex, delivery drivers worked on-demand using their own vehicles; set their own schedules; remained free to accept or reject an assigned delivery; and received pay based on a flat fee or a percentage of the delivery fee.

Companies with independent contractors in California need to immediately reevaluate their independent contractor relationships and adjust as necessary to comply in Dynamex. Companies also need to evaluate how to minimize potential past exposure.