New California Law Redefines Test for Classifying Individuals as Independent Contractors
On September 18, 2019, California Governor Gavin Newsom signed into law a bill that codifies a new test for classifying a worker as an independent contractor. This new law, California Labor Code Section 2750.3, takes effect on January 1, 2020.
New Test for Determining Independent Contractor Status in California
California Labor Code Section 2750.3 codifies and clarifies the standard for determining independent contractor status set forth in the California Supreme Court's decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018). Under this new law, a worker is presumed, for purposes of California's Wage Orders, Labor Code, and Unemployment Law, to be an “employee” unless the payor, or “hiring entity” can establish three conditions:
(A) The person 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.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Previously, the California Division of Labor Standards Enforcement utilized a more flexible, "economic realities" test, which weighed various factors while focusing on the hiring entity's right to control how the work was performed.
Notably, this new law includes exemptions for certain occupations, including among others, licensed insurance agents, registered securities broker-dealers or investment advisers and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry. The independent contractor status of these occupations will continue to be evaluated under the prior, more flexible test, for determining independent contractor status.
Next Steps for Employers
Under this new law, many individuals who were previously classified as independent contractors may need to be reclassified as employees. California employers should therefore review with legal counsel, prior to January 1, 2020, their company's current relationships with independent contractors to determine if they may need to reclassify any of these relationships.
Please do not hesitate to contact any of our attorneys if you have any questions or would like assistance in complying with your company's obligations under this new law.