Skip to main content
Closely Held Businesses

California Announces Change to Independent Contractor Test

By June 27, 2018No Comments

Does your business receive any labor or services through the work of independent contractors? Earlier this year, the California Supreme Court passed a ruling which completely changed the standards for qualifying as an independent contractor vs an employee. The new rules make this classification much more clear-cut, however, this simplicity has made it substantially more difficult to qualify as an independent contractor. This means that many of those workers that you currently classify as independent contractors, may now need to be treated as employees. This article will help to explain these changes in more depth.

In the landmark decision of Dynamex Operations West, Inc. v. Superior Court of Los Angeles, No. S222732 (Cal. Sup. Ct. Apr. 30, 2018), the California Supreme Court unanimously announced a new test for determining whether a worker is an employee or an independent contractor. This newly simplified test is a 3-part standard in which the worker must meet all 3 requirements in order to qualify as an independent contract. The test is as follows:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
    This piece of the test is most similar to the previous standards that were in effect. This means that if a business exercises the same amount of control over a worker as it does over it’s employees, that worker must also be considered an employee. In addition, it is now the responsibility of the business to prove these standards were met.
  • The worker performs work that is outside the usual course of the hiring entity’s business.
    This test is what may cause many workers now categorized as independent contractors to be converted to employees. If the services that the worker provides are thought to be under the ordinary course of business and seem to be typical for that particular business, the worker must now be considered an employee. The court gave an example in order to further clarify: “If a retailer hires a plumber or electrician to perform maintenance at their establishment, an independent contractor relationship is created. If a bakery hires a cake decorator or a clothing manufacturer hires a seamstress that works at home, these workers are employees”.
  • 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.
    This does not mean the worker must have an official business entity through licensing, however, they must’ve taken steps on their own to establish an independent business for himself or herself.

If your business currently receives services through independent contractors and you think these rules may affect you, please feel free to contact your L&B professional at 858-558-9200 to further discuss these details and any potential consequences.

Leave a Reply

SafeSend - a safe and easy solution for your tax engagements! Learn More >>
+