Nonprofits Need to Know About the New “ABC Test” for Classifying Independent Contractors

Nonprofits beware, on April 30, 2018, the California Supreme Court issued an opinion making it difficult to use independent contractors to conduct your essential programmatic activities.

The case – Dynamex Operations West, Inc. v. Superior Court – is aimed at making it harder for companies like Uber and Lyft to use independent contractors, but the breadth of the Court’s ruling extends beyond the Gig Economy, impacting every industry, including the nonprofit sector.

In the Dynamex Operations West case, the California Supreme Court adopted the ABC Test, a narrow standard for determining whether a worker is an employee or an independent contractor for wage and hour purposes (e.g., whether the worker is entitled to overtime compensation).

The ABC Test presumes that every worker in California is an employee, and the burden is on the organization to prove otherwise. To comply with this new ruling, the organization must demonstrate that all three factors are met:

  1. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

This is a challenging standard to meet and it will impact nonprofit organizations. For example, many nonprofit youth sports leagues rely on independent contractors to serve as referees, coaches, and judges. A tutoring organization may have a long tradition of retaining tutors as independent contractors. Many nonprofit organizations also outsource essential overhead needs such as bookkeeping to independent contractors.

In light of Dynamex Operations West case, it is important to review these relationships to ensure that they meet the ABC test, revise existing independent contractor agreements, and potentially re-think operations. Failing to do so could create significant exposure, including liability for unpaid taxes and penalties, as well as, damages arising from violations of state and federal laws governing employee compensation, benefits, and working conditions. For additional information regarding the Dynamex Operations West case and its implications, please contact Andrew Shalauta, Jonathan Wong, or any other member of our Employment practice group.

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