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California Supreme Court Finds Workers are Employees and Not Independent Contractors, Decision Has Significance for Businesses and May Impact Employment Tax Audits

In Dynamex Operations West, Inc. v. Superior Court (Ct.App. 2/7 B249546, Los Angeles County Super Ct. No. BC332016), the California Supreme Court issued a critical decision on the question whether an individual worker should correctly be classified as an employee, or instead, as an independent contractor.  The court held that it was appropriate to look to a standard, commonly referred to as the “ABC” test, to distinguish employees from independent contractors.   Under this test, an employer’s failure to prove any one of the three prerequisites will be sufficient in itself to establish that the worker is an employee for purposes of the wage order.

While the case dealt with worker classification for purposes of California wage orders, read more broadly, the court’s decision could add fuel to employment tax audits handled by the California Employment Development Department.  These detailed and time-consuming audits examine, in part, the nature of the working relationships between the employer and workers, and based upon facts obtained from the records, input from the employer and discussions with the workers, the auditor may determine that the workers are employees rather than independent contractors.  (DE 231TA Rev. 11 (8-18) (INTERNET).

Whether Dynamex will impact employment tax audits remains to be played out.  In the interim, Dynamex is worth reviewing and understanding, as the California law continues to develop in this area.