California Supreme Court Ruling Establishes New Test For Determining Employment Status of Independent Contractors

Decision may lead to higher costs and greater liabilities for employers

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SAN DIEGO, May 9, 2018 — California employers who engage independent contractors are now subject to a stringent new test that may ultimately force employers to reclassify many of these workers as employees, according to a ruling by the California Supreme Court on April 30, 2018.

In affirming a lower court ruling, the justices abandoned a 30-year-old test and created a new standard to determine whether workers who are classified as independent contractors should have the same rights and benefits as full-time employees.

“Many workers who are currently considered independent contractors do not meet the Court’s new standard,” said John Niedernhofer, Director of Marsh & McLennan Agency’s West region Commercial Division. “Employers need to move quickly to determine if their independent contractors are now, in effect, full-time employees. Employers may see new legal challenges from contractors asserting themselves as full-time employees.”

The threat of potential legal action is not the only concern for employers. Unforeseen insurance-related expenses can be significant. Employers should also take note that insurability of the misclassification of employees as independent contractors is limited.

Because workers’ compensation rates are calculated based on payroll, an increase in employees could lead to a substantial increase in insurance premium. Likewise, if a contractor qualifies as an employee and the worker meets the eligibility requirements under the employer’s health benefits plan, an employer could face penalties for failing to offer coverage, or for failing to offer Minimum Value or affordable coverage, to this full-time employee.

New ABC Test

In Dynamex Operations West, Inc. vs. Superior Court, the justices said a worker is an employee unless they meet the following three-part standard, known as the ABC Test:

Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?

Part B: Does the worker perform work that is outside the usual course of the hiring entity’s business?

Part C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

If a worker is classified as an employee, the employer bears the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, and providing workers’ compensation insurance for that employee.

Additionally, if a worker is an employee, the employer must comply with any state and federal statutes and regulations governing the wages, hours, benefits and working conditions of that employee. The employee also obtains the protection of any applicable labor laws and regulations.

“The Ruling has broad implications for California employers across every industry segment,” Niedernhofer said. “California employers should be prepared to reassess their labor strategy and consult with their labor counsel to review how independent contractors are utilized, to ensure compliance with the new standards.”
Action items for employers

To manage the potential challenges, MMA recommends the following:

  • Identify the areas of your business that are currently served by independent contractors and then apply the new ABC standard established by the California Supreme Court to determine whether they are correctly classified.
  • Discuss with your labor and employment counsel on whether any independent contractors may be incorrectly classified.
  • Discuss with your broker any impact to your workers’ compensation or employee benefits plans as a result of changing the status of an independent contractor to an employee.

The Court’s ruling has the potential to have a significant impact on every industry or employer relying on independent contractors. Examining your current independent contractor relationships and agreements should now be a priority for California employers.

To review your policy and potential impacts to your current insurance plans, contact your MMA representative or visit http://info.mma-west.com/independent-contractor-abc-test.