California Supreme Court Makes It More Difficult for Employers to Classify Workers as Independent Contractors

For almost 30 years, California courts have primarily used a subjective, multi-factor test in determining whether a worker was properly classified as an employee or independent contractor.  In March of this year, the California Supreme Court issued a new, more streamlined (and employee-friendly) test.  Under this new test, the burden is on the hiring entity to establish that the worker is an independent contractor.  In order to satisfy this burden, the hiring entity must establish all of the following:

(1) that the worker is free from the control and direction of the hiring entity in connection with the performance of work;

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

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

A worker’s classification as an employee or independent contractor is arguably the most important issue for both California workers and employers.  It determines a worker’s tax status and his or her entitlement to overtime pay as well as meal and rest periods.  For employers who get it wrong and improperly classify their employees as independent contractors, the costs and liability can be devastating.  An employer may be ordered to pay back wages going back four years, back taxes, and interest and penalties.  Because wage claims cannot be the subject of a mandatory arbitration agreement, employers are forced to defend these claims in civil lawsuits, which could result in the employer being held liable for the improperly classified worker’s attorneys’ fees.  As such, employers should be aware of this new law and review their worker classifications.

Stoel Rives will continue to track and analyze how lower courts apply this new law and will post any new information on our blog: www.StoelRivesWorldofEmployment.com.