IRS Form 1099

The California Independent Contractor May Have Just Gone the Way of the Dinosaur

Dear Friends, Colleagues, and Clients,

No good deed goes unpunished!

Unemployment is at the lowest rate in decades. Many Californians work from home or have part time assignments where they are hired by businesses to work on a project by project basis as an outside contractor. Service businesses, such as the legal and accounting industries have especially embraced this new work medium in a significant way along with high tech and other industries for which this form of worker is mutually beneficial. In California, these workers, classified as Independent Contractors (IC), may have just gone the way of the dinosaur.

A 2018 California Supreme Court decision regarding classification of the IC worker may have just killed the golden goose. In Dynamex Operations W., Inc. v. Superior Court, 4 Cal. 5th 903, 913 (2018), the California Supreme Court redefined the very narrow test of whom qualifies as an IC. Those that do not meet this narrow test must be classified as “employees” and the employer must face all the consequences which flow therefrom. The Dynamex Court essentially shredded the long-standing tests to distinguish independent contractors from employees which courts and employers have relied on for years.

In the Dynamex case, delivery drivers sued the entity which hired them when their status changed from employees to independent contractors, without a substantial change in their job descriptions. Prior to Dynamex, courts in California applied a flexible multi-factor test for the purposes of examining whether a worker was properly considered an employee or independent contractor. Essentially, under the old tests, the status of a worker was determined by examining who has the right to control the manner and means of the work. (i) Courts would consider numerous factors including: the ability to hire/fire, the distinctiveness of the work performed, the occupation, customs, and skills required, who provides the instruments for working, the length of service, the method of payment, whether the work is part of the employer’s regular business, and the beliefs of the parties. (ii)

The Dynamex Court rejected this multifactor test, on the grounds that the old test was too uncertain and it allowed employers to evade wage and hour law. (iii) The Court instead adopted what it called “the ABC test.” The ABC test considers a worker an employee by default unless the hiring entity can establish that: “(A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” (iv)

The implications of this Court Decision will be profound. Under the new Dynamex test, hiring entities now have the burden of proving that they are in compliance with a rigid standard that favors classification of workers as employees while keeping in mind that the policy behind the decision was the Court’s belief that employers were “evading wage and hour laws.” Classes of workers that were treated as IC’s for years may now be “personal” liability traps for the companies that use IC’s. In cases where these issues were examined, since the Dynamex decision came down in April 2018, courts are applying the new test retroactively. (v) In other words, you may be liable for things you’ve been doing for years despite taking reasonable steps to comply with the law!

Consider the following questions and the dire consequences of answering them incorrectly: Is your business responsible for paying federal social security and payroll taxes on these workers? Must it pay unemployment insurance taxes and state employment taxes? Must it provide worker’s compensation insurance? Did one of your IC’s injure someone while working for you, and if so are you potentially liable? If one of these workers injures his or herself in the course of doing their work is your company “on the hook” for their medical bills, permanent injuries and lost wages? Can you expect a visit from the California’s Division of Labor Standards Enforcement for allegedly failing to comply with wage and hour laws or working conditions that you had no idea even applied? Are you “personally” liable if the company can’t pay?

This case demonstrates how courts can implement sudden and drastic changes in long standing laws that may give rise to unforeseen liability – liability that arises from what were formally sound business practices! It is this uncertainty that will keep you up at night.

So, what should you do to resume sleeping soundly? As a preliminary matter, every California business owner that utilizes what it believes to be independent contractors should, along with competent counsel, re-evaluate how they classify these workers. A prudent business owner should also consider instituting a rational and effective asset protection structure at the personal and/or company level to protect the company and its owners from unforeseen, potentially catastrophic lawsuits that arise from legal decisions like this – decisions that change the rules in the middle of the game. As to this second suggestion, it would be our pleasure to discuss your options with you.

Wishing all of you a very happy, healthy, and prosperous New year.


(i) See e.g. S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341, 351 (1989)

(ii) Id.

(iii) Id. at 955.

(iv) Id. at 955-56.

(v) See e.g. Garcia v. Border Transportation Group, LLC, 28 Cal. App. 5th 558, 83 Cal. Comp. Cases 1775, 2018 Cal. App. LEXIS 949, 2018 WL 5118546

Posted in Client Alert, Taxes / Laws.