We have written previous articles over the past year discussing the groundbreaking April 30, 2018, California Supreme Court decision in Dynamex Operations West, Inc. v Superior Court of Los Angeles which, in practice, significantly increases the liability risk and damages exposure to individuals or businesses seeking to classify workers as independent contractors. The Dynamex decision created a simplified three-factor test, referred to as the “ABC Test,” under which the hiring party must prove that the prospective independent contractor is:
- free from the control and direction of the hiring party,
- performing services that are outside the core of the hiring party’s business, and
- engaged in an independently established trade, occupation or business which performs work similar to the work performed for the hiring party.
As previously advised, Factor B is proving to be the most difficult requirement for hiring parties to meet. As a result, best practices for individuals or businesses hiring workers in California is to retain those workers as employees rather than independent contractors. But that statement is proverbially easier said than done, in part, due to issues left unresolved by the Dynamex opinion. Specifically, Dynamex did not address whether the ABC Test should be applied (1) retroactively (to claims and cases based on acts and omissions occurring before the decision) or (2) only to claims, rights or obligations grounded in the Industrial Welfare Commission (“IWC”) Orders (which include minimum wage, overtime and meal and rest break obligations).
However, agencies, lawmakers and courts have engaged in ongoing efforts to address these important questions.
Retroactivity of Dynamex ABC Test
The retroactivity of the Dynamex decision had, so far, only been addressed at the trial court level with most courts finding that the ABC Test properly applies retroactively because the fundamental elements of the classification analysis did not change but, instead, clarified existing law. However, in a May 2, 2019 decision, Vazquez v. Jan-Pro Franchising International, Inc., the Ninth Circuit reaffirmed the trial courts’ majority view that Dynamex applies retroactively. Ninth Circuit decisions are not binding on California state courts but are viewed as persuasive authority. Consequently, unless or until a California appellate court rules differently, the Dynamex ABC Test should be used in examining California worker classification issues for the past, present and future.
Scope of Claims Covered by Dynamex ABC Test
Dynamex addressed the classification of workers bringing claims under IWC Wage Orders, but the Court did not expressly limit the scope of its decision to those claims. Consequently, Dynamex creates a legal landscape in which the same worker may be properly classified as both an employee and an independent contractor depending on the types of claims brought or examined. In practice, this type of legal inconsistency creates huge risks and uncertainties for businesses and workers alike. For example, how should a worker be classified if he or she does not pass the Dynamex ABC Test but does pass the Economic Realities Test which is applied under federal law to ERISA, social security and other federal benefits?
Amidst this uncertain legal landscape and a highly divided and partisan political climate, California agencies and politicians have taken competing steps to expand or contract Dynamex’s scope.
At the agency level, on May 3, 2019, the Division of Labor Standards Enforcement (“DLSE”), California’s wage and hour enforcement agency, issued a letter opining that the ABC test applies to both the IWC Wage Orders and any Labor Code provisions that enforce requirements set forth in the Wage Orders. DLSE decisions are not binding on state or federal courts but they are examined and may be cited for persuasive authority and, of course, will apply to wage claims adjudicated by the DLSE.
On the legislative front, California Assembly Bill (“AB”) 5, was introduced by Democratic state Assemblywoman Lorena Gonzalez in December 2018, seeking to codify the Dynamex ABC Test into California’s Labor Code and expand its scope by making it applicable to a panoply of employment laws including paid family leave, expense reimbursement, workers’ compensation and health and unemployment insurance. Ms. Gonzalez has said in a statement supporting AB 5:
“Individuals are not able to make it on three side hustles. That shouldn’t be the norm. That shouldn’t be accepted . . . In a state with one of the country’s highest poverty rates, this court decision is crucial to helping Californians maintain solid employment in an economy that’s left millions struggling.”
Conversely, Republican state Assemblywoman, Melissa Melendez, sponsored a competing bill in December 2018, AB 71, that seeks to reverse the Dynamex ABC Test to be replaced by the multi-factor Borello test that applied before Dynamex.
AB 5 and AB 71 remain in consideration stage with AB 5 one step ahead following its recent approval by the state Assembly. AB 5 is now proceeding to the state Senate for consideration. We will continue to monitor these and other developments in this dynamic legal arena.
We here at Scherer Smith & Kenny LLP remain available to address any questions you may have related to independent contractor classification and any other employment- or business-related issues. For additional information, please contact Denis Kenny at ([email protected]), Ryan Stahl at ([email protected]), or John Lough, Jr. at ([email protected]).
– Written by Denis Kenny