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California Supreme Court Decision on Independent Contractors

Stephen Fishman
Tax expert and contributor MileIQ

In a decision that could have significant implications for gig workers in the Sunshine State, the California Supreme Court has held that a new legal test must be used to determine whether California workers are employees or independent contractors. The ruling clarifies the legal standard for distinguishing between employees and independent contractors. (Dynamex v. Superior Court) There are existing state regulations that outline minimum wage and overtime rates for nonexempt employees. Presently, these rules don't apply to workers classified as independent contractors.

The California Supreme Court's decision adopts a three-factor test – the ABC test – which presumes workers are employees unless a business can prove they meet the criteria under all three qualifications that classify them as independent contractors. Since 1989, the state's courts have relied on the more flexible worker classification standard of the common law right-to-control test. Under the ABC test, a worker qualifies as an employee only if:

(A) the worker is free from the control and direction of the hiring firm when performing the work

(B) the worker performs work outside the usual course of the hiring firm's business, and    

(C) the worker has an independently established trade, occupation or business. (Dynamex v. Superior Court)  

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Decision Only Applies to California

This legal opinion only applies to California, and it only applies to wage and hour regulations. It is unclear whether it will also be used in the future to determine whether California workers are employees for purposes of California unemployment insurance, workers' compensation, and tax laws.

The case has no impact on the federal tax status of workers since federal income and payroll taxes are determined under a much less restrictive right of control test.    

The case affects all workers in California. However, the ruling could have an immense impact on the gig economy in California. Companies like Uber, Lyft, Upwork and many others that routinely classify their workers as independent contractors may have to reclassify them as employees in California for purposes of the state's wage and hour regulations.    

Consequently, the minimum wage and time-and-a-half for overtime rules go into effect for workers reclassified as employees. We'll have to see how this plays out in the next few months.

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