California Supreme Court Weighs In On Independent Contractor vs. W2 Employee Classification

In a recent decision, the California Supreme Court made an important ruling regarding the classification of workers as employees vs. independent contractors. In Dynamex Operations West, Inc. v. Superior Court of Los Angeles County (Lee), 4 Cal. 5th 903 (2018), the Court endorsed the “ABC” test in analyzing whether delivery drivers could pursue a class action against Dynamex for wage claims when Dynamex classified the drivers as independent contractors. 

The ”ABC” test endorsed by the Court requires looking at three factors: A) Is the worker free from the control and direction of the hiring entity in the performance of work? B) Does the worker perform work that is outside the usual course of the hiring entity’s business? C) And, is the worker customarily engaged in an independently established trade, occupation, or business in the same nature as the work performed for the hiring entity?  A “yes” answer is required to all three questions, in order to lawfully classify a worker as an independent contractor. And, the burden is on the hiring entity to establish that the worker is an independent contractor (and gets no presumption that the worker is an independent contractor).

This decision could affect the independent contractor classification of real estate and mortgage loan originators. With respect to loan originators, factor B is particularly relevant.  The Court used the analogy of a retail store using a plumber to fix a leak in a bathroom as an independent contractor vs a clothing manufacturer retaining a seamstress to make its clothing on an independent contractor basis.  The retail store is not in the business of fixing leaks in bathrooms, But, the clothing manufacturer is in the business of making clothing. One can certainly see a similarity with respect to mortgage loan originators. The hiring entity is only in the business of making mortgage loans.

The reasoning in the Dynamex decision has not yet been applied outside of the context of that case.  However, it is likely to be applied in other industries. If you have any questions about how it might apply to your business, please contact us to discuss.