Five Tips for Using Independent Contractors in California

By: Grace Mehta

In Dynamex Operations West, Inc. v. Superior Court of Los Angeles, (2018) 4 Cal.5th 903, the California Supreme Court adopted the ABC Test for determining whether certain workers should be classified as independent contractors. The ABC Test, which was codified by the state legislature in 2019, is an employee-friendly test that presumes a worker is an “employee” by shifting the burden of proof onto the employer/company. 

Under the ABC Test, companies need to affirmatively show all three of the following factors with respect to their independent contractors:

  1. They are free from the control and direction of the company in the performance of the work, both under the contract for the performance of the work and on the facts; and 
  2. They perform work outside the usual course of the company's business; and  
  3. They customarily engage in an independently established trade, occupation, or business of the same nature as the work performed.

While the ABC Test does pose a bigger hurdle for companies that want to use independent contractors, it is not insurmountable. Here are some key tips for using correctly classified independent contractors:

  1. Review all existing independent contractor relationship agreements for compliance with the ABC Test. The ABC Test is harder for companies to prove and the penalties for improperly classifying workers can be significant, including wage and hour penalties (overtime pay, back wages, meal/rest period recovery, etc.); workers’ compensation penalties; tax and benefits-related penalties; penalties for willful violations; and injunctive relief.
  2. Don’t rely solely on a written agreement to establish a worker’s employment status. While written independent contractor agreements are critical to formalizing this type of work, these agreements alone are insufficient evidence for a company when its independent contractor classifications are challenged. A company cannot change a worker’s status from employee to independent contractor by simply executing a written agreement to that effect or by providing the worker with an IRS Form 1099 instead of a W-2.
  3. Limit the scope of the independent contractor agreement to a specific project. If the independent contractor is going to perform work on multiple projects, it is best to outline each project in separate agreements. Single agreements covering various projects tend to suggest the independent contractor is acting as an employee. Take time to describe the nature and scope of each project by drafting separate, written agreements. Continuously reassess the working relationship with the independent contractor, especially before beginning any new project, making sure that any new work still complies with the ABC Test.
  4. Train other employees who monitor and/or work with your independent contractors. Independent contractors must be free from control over the manner and means of their work. Because freedom from control is a key distinction between employees and independent contractors under the ABC Test, a company should train its employees to exercise minimal control, if any, over how an independent contractor chooses to perform their work. For example, the hiring entity may dictate a timeline or due date for the project, but it should not specify how the work is to be performed. It is important to keep other employees informed about the nature of the company’s relationship with independent contractors, so they too remember to avoid this pitfall.
  5. Do not treat an independent contractor as an employee. While it may sound obvious, this is a common pitfall. For example, an independent contractor should be excluded from employee-specific meetings, such as employee trainings or meetings about employee benefits. Similarly, the contractor should not be supervised, should not be attending company events and functions, and should not be subject to discipline/performance reviews or other policies as outlined in the employee handbook.

For additional tips check out “California Employers Beware: 3 Things to Consider When Hiring Independent Contractors.” For more information, contact the author of this post. You can also subscribe to this blog to receive email alerts when new posts go up.

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