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CA Supreme Court Announces New Test on Whether Workers Are Employees or Contractors

May 1, 2018Alerts Labor & Employment Alert

Establishing that a worker in California is an independent contractor, as opposed to an employee, has always been difficult.

Now the California Supreme Court has made it even harder.

In Dynamex Operations West, Inc. v. Superior Courtthe justices were asked to decide what test determines whether a worker is an employee under the California Industrial Welfare Commission Wage Orders.

Under the new test, workers are presumed to be employees of a hiring business unless the business can satisfy three separate requirements to establish the worker's independent contractor status.

We cannot overstate the importance of this decision. The wage orders guarantee employees, among other things, minimum wages, maximum hours, overtime compensation, and meal and rest breaks. Independent contractors do not receive those protections. The court’s broad interpretation of the meaning of “employee” under the wage orders will require many businesses that currently rely on independent contractors to reclassify workers as employees. This will not only impose substantial costs on businesses that have relied on independent contractors, but also subject them to liability for not previously providing the wages, breaks, overtime, etc. that employees are entitled to.

Facts

Two delivery drivers sued Dynamex, a courier and delivery company, alleging that it improperly classified them and similarly situated drivers as independent contractors. The drivers set their own schedules, decide what deliveries they’ll make, and use their own vehicles. They are sometimes required to wear clothing with the Dynamex logo or place that logo on their vehicles. They are allowed to hire others to do the work and to work for other delivery companies or for themselves.

The trial court, in certifying the class of drivers, found that the wage orders define the term “employ” to mean “(a) exercise control over the worker’s wages, hours, or working conditions, (b) suffer or permit work, or (c) to engage, thereby creating a common law employment relationship.” The trial court rejected Dynamex’s contention that the multifactor test of employees articulated in the California Supreme Court’s 1989 decision in S.G. Borello & Sons, Inc. v Department of Industrial Affairs governed whether a worker was an employee or independent contractor under the California’s wage orders. This is despite the fact that courts and administrative agencies in California have been using the test for decades. Even the Division of Labor Standards Enforcement, which enforces the Wage Orders, states in its Enforcement Policies and Interpretations Manual that the Borello test applies.

Dynamex moved to decertify the class, arguing that two of the alternative definitions of “employ” discussed in another California Supreme Court case, Martinez v Combs (2010) 49 Cal.4th 35, 64the “suffer or permit” and the “engage” tests, did not apply in this context. Both the trial court and the Court of Appeal rejected Dynamex’s argument. Dynamex filed a petition for review with the California Supreme Court, and the Court agreed to consider the issue.

The California Supreme Court agreed that the multi-factor Borello test, which focuses on the employer’s ability to control the manner and means of accomplishing the desired result, is not the only test to determine if a worker is an employee or an independent contractor. As it has done frequently of late, the court explained that it must interpret these protections broadly to protect workers from unscrupulous employers. The court also concluded that the new test it articulates provides greater clarity and consistency than a test that involves balancing multiple factors on a case-by-case basis.

The New Test

The court adopted what is known as the “ABC test.” Workers are presumed to be employees of a hiring business unless the business can satisfy three separate requirements.

To establish that a worker is an independent contractor under the wage orders, the business must show that: (A) the worker is free from the control and direction of the hiring business in connection with the performance of the work; (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business. The court, in its discretion, may start with any prong of three prongs of the test to resolve the question whether the workers are properly classified as independent contractors.

Prong “A” looks at whether the hiring business is able to control and direct what the worker does, both under the terms of the contract and in actual practice. The business need not control the exact manner or details of the work, as long as it maintains the level of control employers typically maintain over employees.

Under prong “B”, the worker must be performing tasks outside the usual course of the hiring entity’s business. This will be especially problematic for companies in the gig economy that rely heavily on independent contractors. No matter how much freedom those workers have to decide when to work, where to work, or what to do, if they are performing services in the usual course of the hiring company’s business, they will be deemed to be employees of the business. The Court used the examples of a retail business that hired an outside plumber to repair a leak and a clothing manufacturer that hired an at-home seamstress to make clothes from patterns and cloth supplied by the company. The outside plumber would be an independent contractor because he performed services outside the company’s usual course of business, but the seamstress would be an employee since the work performed is within the company’s usual course of business.

Under prong “C”, the workers must be customarily engaged in an independently established trade, occupation, or business. The workers must have independently decided to go into business for themselves and, in doing so, independently accepted the burdens and benefits of self-employment. Further, it is not enough that the company has not prohibited a worker from engaging in such a business. To meet this standard, the individual should have taken the steps to establish and promote their individual business such as through incorporation or licensure, creating business cards, advertisement, or routinely offering their services to the public or to other potential customers. Unless the employer can satisfy all three prongs, the worker is considered an employee.

Key Takeaway

The new test is considerably broader and more inclusive than the S.G. Borello & Sons test which courts, agencies, and employers in California have relied on for years. Consequently, many businesses will need to revisit whether their workers qualify as independent contractors. If they do not, the businesses need to either modify the relationship or start providing the workers with the pay and treatment required by the wage orders. Since the decision only addresses the wage order requirements, different standards will apply in determining whether the workers are independent contractors for purposes such as workers’ compensation and payroll taxes. The Labor and Employment attorneys at Fox Rothschild LLP are always available to help address these complicated issues.

This publication is intended for general information purposes only. It does not constitute legal advice. The reader should consult with knowledgeable legal counsel to determine how applicable laws apply to specific facts and situations. This publication is based on the most current information at the time it was written. Since it is possible that the laws or other circumstances may have changed since publication, please call us to discuss any action you may be considering as a result of reading this publication.