The Dynamex effect: classifying contractors in the online gaming industry



April 26, 2019

Esports Alert

Author(s): Benjamin J. Kim, Irene Scholl-Tatevosyan

Emerging industries that rely on freelance or contracted workers, such as the esports industry, face challenges in light of California's decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles. This alert discusses what esports and gaming companies with California-based independent contractors need to know.

For emerging industries that rely on freelance or contracted workers, such as the esports industry, the 2018 Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles has created significant challenges when classifying workers as independent contractors. In light of Dynamex, esports and gaming companies with independent contractors in California should:

  • Review the nature and scope of the business, including internal and external marketing of that business;
  • Assess how independent contractors have been used and evaluate whether changes should be made; and
  • Consider ways to mitigate legal risks and exposure.

In Dynamex, California adopted the “ABC” independent contractor test, which, among other requirements, mandates that an independent contractor perform work that is outside the usual scope of the hiring entity’s business. For more on the ABC test in California, see our prior alert, “California Supreme Court raises the bar for workers to be classified as independent contractors: what employers need to know.

For instance, ride sharing technology companies have consistently marketed themselves as a mobile phone “app” platform whose service connects drivers to passengers, not as a classic transportation business. The latter would mean that drivers for these “app-based” services should be classified as employees under the ABC test. This is important for esports and gaming technology companies that rely on contracted workers. For example, the game development company that hires a contractor in California to help develop a game may take on significant legal risk that the individual should be an independent contractor because that worker arguably is performing a task that is the function of the business.

Companies with operations outside California also should note that other states may follow different tests for determining whether an employee is an independent contractor or an employee. For example, while Nevada also uses the ABC test for unemployment insurance purposes, unlike California, Nevada law conclusively presumes that a worker is an independent contractor for the purpose of applying the state’s wage and hour laws, provided certain conditions are met. Some other states use the economic realities test, which focuses on how much control the hiring entity exercises over the worker.

In the wake of Dynamex, esports and gaming companies should examine the nature and scope of their business as well as how they market that business externally and internally. Communications on the scope of the business should be consistent and, to the extent possible, limited to the core of the business. Limiting the scope of the business, however, can be particularly difficult for esports and gaming companies that often cross-over into multiple different industries. Given the complexities of the esports and gaming industries, such companies should review how they use independent contractors in California with legal counsel and find ways to mitigate their risks and exposure regarding the use of such workers.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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