In a unanimous decision, the California Supreme Court embraced a standard that presumes workers in California are employees instead of independent contractors. The April 30, 2018 decision in Dynamex Operations West Inc. v. The Superior Court of Los Angeles County moves away from a more flexible classification test that had been in effect for nearly three decades and it has the potential to upend businesses in the burgeoning gig economy and others whose business models rely on the use of independent contractors.

In the Dynamex case, independent contractor delivery drivers filed a class action suit against their delivery company alleging that they were misclassified and should instead be considered employees, not independent contractors. As employers in California are aware, a finding of worker misclassification can result in awards of unpaid wages, as well as penalties, interest and attorneys’ fees – amounts that can be very significant depending on the number of individuals involved.

In a unanimous decision, the California Supreme Court embraced a standard that presumes workers in California are employees instead of independent contractors. The April 30, 2018 decision in Dynamex Operations West Inc. v. The Superior Court of Los Angeles County moves away from a more flexible classification test that had been in effect for nearly three decades, and it has the potential to upend businesses in the burgeoning gig economy and others whose business models rely on independent contractors.

In the Dynamex case, independent contractor delivery drivers filed a class action suit against their delivery company alleging that they were misclassified and should instead be considered employees, not independent contractors. As employers in California are aware, a finding of worker misclassification can result in awards of unpaid wages, as well as penalties, interest and attorneys’ fees – amounts that can be very significant depending on the number of individuals involved.

The California Supreme Court, in deciding what standard to use in determining whether the workers were employees or not, rejected the prior multi-part test that had been in use for nearly 30 years, but which had led to inconsistent outcomes. Instead, it adopted the “ABC” test used in a few other states, which presumes workers are employees instead of independent contractors for purposes of state wage orders — such orders govern items such as overtime and meal and rest breaks — and places the burden on employers to prove the workers aren’t employees.

The ABC test requires that for a worker to be considered an independent contractor, the business he or she works for must show that the worker is:

(A) free from its control and direction;

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

(C) is engaged in an independently established trade, occupation or business.

The alleged employer must prove each of these three elements as to the work for him or her to be considered an independent contractor for purposes of wage orders.

The Court’s ruling gave an example of what it considered a qualifying independent contractor relationship: a plumber hired by a store to fix a bathroom leak. Conversely, it noted that a seamstress sewing at home using materials provided by a clothing manufacturer would probably be considered an employee, not an independent contractor.

This sea-change ruling raises questions about the potential viability in California of the business model for many gig economy companies who rely on workers to deliver goods or food, transport people, or handle to-do list tasks such as laundry or grocery shopping. While such companies have in the past attempted to define themselves as “software companies” that only provide a platform for providers and customers to connect, or have argued that they do not exert sufficient “control” over the worker to be considered an employer, this new standard from the Dynamex case will make such arguments far more difficult.

Any California business that engages independent contractors in its core business functions or to accomplish tasks that are in the usual course of the company’s business should reassess those relationships under this ABC test and determine whether an employment relationship may be in effect. As these determinations can be tricky, and can have such a large impact on a business’s model and the financial risks associated with workers, in-house or outside legal counsel should surely be closed involved in these assessments.