By: Josh Siegel, Senior Manager, Mergers & Acquisitions &
Grace Shirvani, Senior Associate, Mergers & Acquisitions
On April 30, 2018, the California Supreme Court’s ruling in the appeal of Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County established a new, more difficult path for California businesses to justify independent contractor status. This new worker classification test applies specifically to the definition of “to suffer or permit” under the California’s Industrial Welfare Commission (“IWC”) Wage Orders, leaving undetermined which test will apply to claims under other statutes.
The court’s ruling made it more difficult to classify a worker as an independent contractor because the ruling creating a test that puts the burden on employers to prove a worker is not an employee. Formerly, the state used a test that took into consideration the level of control the hiring business had over the performance of the work (i.e., could the hiring business control the “manner and means” of how the worker completed their work). The new law presumes that a worker is an employee unless the hiring entity establishes each of the following three factors, commonly known as the “ABC test”:
(A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
(B) the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) 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.
According to the ABC test, it appears that businesses will now have the following issue – even if the business has no control over a worker and the worker has an independent business, they will still be classified as an employee if they perform work that is part of the usual business operations of the hiring entity.
It is important to accurately distinguish between independent contractors and employees because a misclassification can have serious tax implications. Tax implications include, but are not limited to – (i) liability for taxes the employer should have withheld from the employee’s compensation if the worker was initially misclassified as an independent contractor; and (ii) the employer’s share of the employment taxes that should have been paid if the worker was accurately classified as an employee.
Please contact you Squar Milner tax advisor if you have any questions regarding the content of this article.