Workers Compensation: New Independent Contractor Test May Impact Your Business

On April 30, 2018, the California Supreme Court issued a decision that clearly makes it harder now to label workers as “independent contractors” under Industrial Welfare Commission (IWC) wage orders. The result: Workers Compensation audits in California will be more scrutinized in the future against employers attempting to classify workers as independent contractors vs. employees.

The new ruling is clear: The label an employer chooses, or the label used in a contract, does not matter in classifying a worker. Instead, the type of work performed matters.

The Supreme Court placed the burden on an employer seeking to classify an individual as an independent contractor instead of an employee to satisfy a three-factor test. Workers have long been presumed to be employees unless the employer proves all three factors that the worker:

1) is not under the control of the employer;

2) performs work outside of the usual course of business; and

3) is in a customarily independent trade.

The ruling stemmed from a class action lawsuit by delivery drivers against a package and document delivery company. The drivers alleged that the document delivery company misclassified drivers as independent contractors, and therefore violated an IWC Wage Order and engaged in unfair business practices.

The Supreme Court evaluated the core issues related to the appropriate legal standards for determining if a worker is an employee or an independent contractor. The Supreme Court agreed with the drivers. The Court adopted a three-factor “ABC” test that the company must satisfy in order to establish that a worker is an independent contractor:

  1. The worker is free from the control and direction of the hiring entity in the performance of the work, both under the contract calling for the performance of work and in fact;
  2. The worker performs outside the usual course of the hiring entity’s business; and
  3. 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.

The Court held that the failure of the company to prove any one of these factors is grounds to establish that the worker is an employee.

As we know, all California employers are subject to IWC wage orders. This court decision will have substantial consequences on some employers, particularly those that involve transportation activities, like contractors that have trucking operations. Misclassification of employees as independent contractors can result in significant liability for employers; labor code penalties as high as $25,000 per violation, payroll tax, overtime, unemployment benefits, and of course workers compensation premiums.

We recommend consulting with your labor attorney and insurance professional to assure your workers are properly classified.