The California Supreme Court has significantly narrowed the definition of an independent contractor, likely requiring companies to begin paying various taxes and benefits for more workers.

The decision follows a class-action case centered on two drivers who worked for Dynamex Operations West, a national delivery company. They accused the firm of illegally classifying its drivers as independent contractors. The workers did not have the characteristics of independent businesspeople – namely, they did not have employees nor did they provide their service to companies other than Dynamex.

The lower court sided with the drivers, and the California Supreme Court agreed.

“... We conclude that the [law] must be interpreted broadly to treat as ‘employees,’ and thereby provide the wage order’s protection to, all workers who would ordinarily be viewed as working in the hiring business,” the court said in its published opinion, which included the italic emphasis.

The court replaced the long-time test in California for determining whether or not a worker can be classified as an independent contractor. Where the previous test was fairly complicated and open for many interpretations, this one is more direct. To determine whether a worker qualifies as an independent contractor, the court ruled, companies must employ the ABC test used in other contexts.

As explained in the court decision: “Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (A) that 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; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that 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.”

Criteria B and C will pose tough hurdles for companies to clear. For B, the court posed the following question: Does the worker perform work that is outside the usual course of the hiring entity’s business?

For this question, the court compares two situations: A retail store that contracts a plumber to repair a leak versus a clothing manufacturer that uses work-at-home seamstresses. In the first example, the plumber performs a job completely different from that of the retailer. “In the latter settings,” the court said, “the workers’ role within the hiring entity’s usual business operations is more like that of an employee than that of an independent contractor.”

Further, it said, “... a hiring entity must establish that the worker performs work that is outside the usual course of its business in order to satisfy part B of the ABC test.”

For criterion C, the court poses the following question: “Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

A true independent contractor, the court said, bears that designation by his or her own doing, not by the employer’s. Such a person has made the choice to start a business and takes steps to promote it, such as incorporating, gaining licenses, and advertising his or her services.

“When a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor by the unilateral action of a hiring entity,” the court said, “there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification.”

The fact that a company does not prevent such individuals from soliciting work elsewhere does not help their case, the court said. It went on to say: "In order to satisfy part C of the ABC test, the hiring entity must prove that the worker is customarily engaged in an independently established trade, occupation, or business."

Not only would this test prove fairer to workers, the court contended, but it also would level the playing field for those companies that already provide employee status and benefits to its workers.

For each reclassified worker, employers must begin to pay Social Security taxes, federal unemployment insurance, and workers compensation, as well as complying with minimum wage laws and offering break times and other benefits. This could drive costs up approximately 20% for each employee, said Ray Arouesty, senior vice president of HUB International Insurance Brokers.

Arouesty, who supplies insurance for the Independent Pool and Spa Service Association, expects the decision to affect pool/spa service firms particularly hard. And he doesn’t expect it only to affect the Golden State.

“What occurs in California generally moves east with the prevailing winds,” he said. “We’ve seen that before, so I would not be surprised if other states adopt this ruling.”

While companies likely will bristle at the added expense, he said, company owners may view at least two likely outcomes as positive: First, he agrees with the court that it will help level the playing field for those companies that already classified its workers as employees; secondly, it removes the complicated equation for determining whether a worker can be classified as an independent contractor.

“We had a multitude of tests that the various regulatory agencies used ... and that didn’t result in a lot of certainty to businesses, who didn’t know if they’d be vulnerable to regulatory fines and penalties for misclassifying workers,” he said.

He advises all employers who currently classify workers as independent contractors to consult with a certified public account, at the very least, as well as an attorney.

This is a developing story. Come back for additional details, reactions and analysis.