Is the Independent Contractor a Thing of the Past?

A recent California State Supreme Court Decision, Dynamex Operations West, Inc. v. Superior Court of Los Angeles County (2018), has surprised many industries and may affect the way a lot of construction companies form themselves, hire workers and structure their business.

At issue in the Dynamex case was what standard applies in determining whether workers should be classified as employees or as independent contractors for purposes of California wage orders and overtime. Two delivery drivers filed this action alleging that Dynamex Operations West, Inc., the delivery company, had misclassified its delivery drivers as independent contractors rather than employees and was engaging in unlawful business practices and failing to comply with California Labor Code requirements.

The decision put forth a new test for classifying whether a worker is an independent contractor or an employee. Dynamex essentially adopts the “ABC Test” instead of a nearly 30-year old multi-factor test, first elucidated in S.G. Borello & Sons Inc. v. Department of Industrial Relations (1989), for determining whether a worker was properly classified as an independent contractor, or whether the worker was really an employee for whom payroll taxes would be required to be deducted, meal and rest breaks provided, overtime paid, etc. The ABC Test begins by assuming that everyone is an employee of the company that “employs” them. Under the new ruling, to make someone an independent contractor, California hiring parties must prove the three below prongs:

1. that the worker is free from the control and direction of the hirer in connection with the performance of the work;
2. that the worker performs work outside the scope of the hiring entity’s business (such as a freelance plumber who services the pipes for the office of an electrical engineering firm); and
3. that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed (such as having made the affirmative decision to go into business for herself, perhaps by incorporating or starting an LLC).

If the three prongs of the ABC Test cannot all be met, the worker is an employee, even if the worker were to otherwise choose to be treated as an independent contractor.

It is important to note that the Dynamex decision is limited to wage and hour claims, and until someone brings a lawsuit outside of a wage order, and the ABC Test is adopted as the rule, the Dynamex decision is not as applicable. And while the decision undoubtedly affects a dramatic change in the law for many industries, it carries significantly fewer consequences for the construction industry as most engineers, construction managers, general contractors, surveyors, architects, subcontractors, builders, equipment lessors, machinists and material suppliers are in fact independent contractors under the ABC Test. It may, however, hurt workers who have flexible, independent, or part-time work, or affect the contractor who hires workers as independent contractors in order to avoid having to pay for workers’ compensation insurance under requirements of the Contractor’s State License Board.

Yet, contractors who hire workers as independent contractors in order to avoid the costs and expenses associated with payroll, overtime pay, workers’ compensation insurance and other traditional employee benefits and protections were likely already in violation of the Contractor’s State License Board and California Business and Professions Code requirements prior to the Dynamex decision. All contractors are required to submit a Certificate of Workers’ Compensation Insurance or Certification of Self-Insurance of Workers’ Compensation from the Department of Industrial Relations as a condition of licensure to maintain a license, activate an inactive license, or renew a license, unless they are exempt from the workers’ compensation requirement. Contractors are exempt from the requirement for workers’ compensation insurance if they do not have employees working for them (except C-39 Roofing contractors), but they must file a certification of this exemption with the Contractor’s State License Board Registrar.

The independent contractor in the construction industry is not dead. But that does not mean that the construction industry should ignore Dynamex. It is important to understand the ABC Test and for construction companies to prepare themselves in hiring and classifying workers and modeling their business structure.