On April 30, 2018, the California Supreme Court in Dynamex Operations W. v. Superior Court (2018) 4 Cal.5th 903, announced a sea change on who is an employee, rather than an independent contractor (“IC”), for claims under California’s Industrial Welfare Commission Wage Orders (“Wage Orders”), which regulate the wages, hours, and working conditions of workers in California. Such claims include minimum wage, overtime, and meal and rest breaks, among other things.
In brief, the California Supreme Court adopted what is referred to as the ABC Test (it is derived from a test adopted in other states, including Massachusetts), under which a hiring entity must prove three elements for valid IC classification of its workers. This article will discuss those three elements in detail below.
Two delivery drivers alleged that Dynamex, a nationwide same-day courier and delivery service, had improperly classified them and other “similarly situated” drivers as ICs. In relevant part, these drivers:
- were paid a flat fee or percentage of the delivery fee received from the customer;
- were generally free to set their own schedules;
- were free to reject or accept jobs assigned by Dynamex;
- used their own cell phones and vehicles for work;
- were free to choose their own routes;
- could perform work for other companies; and
- were hired for an indefinite period of time.
Under most tests distinguishing ICs from employees, these facts would have weighed toward an IC determination. However, in a densely-academic opinion, the Court held that the “suffer or permit to work” definition of “employ” contained in the Wage Orders should replace the more flexible “right of control” test which has been used in California since 1989.
Specifically, the Court adopted the “ABC” test as the proper way to distinguish employees from ICs. Under the ABC test, if the hiring entity establishes all three elements below—(A), (B), and (C)—then the worker is an IC:
A. Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
B. Does the worker perform work that is outside the usual course of the hiring entity’s business?
C. 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?
(Id. at 956–58.) Of material note, prong (B) in other jurisdictions also permits a worker to be treated as an IC if the work is “performed outside all the places of business of the hiring entity,” and the Court rejected that formulation of prong (B) in favor of Massachusetts’s formulation. (Id. at 956 n.23.) The reason being that Massachusetts’s version is “consistent with California’s intended broad reach of the suffer or permit to work definition” found in the Wage Orders and captures the fact that the modern work force telecommutes or works from homes. (Id.)
To illustrate how the ABC test works, the Court gave the example that a worker would be properly classified as an IC “only if the worker is the type of traditional independent contractor—such as an independent plumber or electrician—who would not reasonably have been viewed as working in the hiring [entity’s] business.” “On the other hand,” the Court said, “when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company,” or “when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees,” and not ICs. (Id. at 953, 959–60, citations omitted.)
Critically, the ABC test is an all-or-nothing test, that is, if the hiring entity cannot establish one of the elements, the worker is an employee. In fact, the Court noted that “it may be easier and clearer for a court to determine whether or not part B or part C of the ABC standard has been satisfied” rather than delving into the degree of control attendant with part A of the ABC test. (Id. at 963.)
Open Questions in the Wake of Dynamex
Some of the key issues to follow concerning the Dynamex decision include:
1. Retroactivity? Dynamex filed a petition for rehearing, in part, seeking a ruling on whether the Court’s decision should apply retroactively or prospectively. On June 20, 2018, the Court denied the petition for rehearing and request for modification of its opinion. The Court’s April 30, 2018 opinion is now final and will be presumed to apply to all pending and future cases. This means the decision will apply retroactively. The only current recourse for limitations on this decision entails possible legislative change. Business groups are actively lobbying for such change. Notably, a group of over 70 businesses and business organizations recently requested State of California officials to delay or defer application of the Dynamex decision.
2. The “new” ABC test applies only to claims, rights and obligations grounded in one of the IWC Wage Orders. Specifically, in a footnote, the Court refused to address whether the multi-factor Borello test was still the applicable standard for various obligations under the California Labor Code, including the obligation to reimburse employees and to provide them with workers’ compensation benefits. (Id. at 916 n.5; see also Salgado v. Daily Breeze (California Court of Appeal June 6, 2018) 2018 WL 2714766 at *15 n.6; Curry v. Equilon Enterprises, LLC (2018) 23 Cal.App.5th 289, 314 [holding that the “ABC” test “does not appear” to apply in the joint employment context].)
This means that the host of other IC tests (e.g. the Borello factors) still apply to other types of employment claims such as failing to provide workers compensation and unemployment insurance, ERISA benefits, unreimbursed employment expenses, tax laws etc… This also means that it is conceivable a worker could be treated for wage and hour purposes as an employee but for other purposes (such as tax laws) as an IC.
In the ever-changing employee / independent contractor landscape, we will continue to follow all developments.
Please contact Denis Kenny at (email@example.com), Ryan Stahl at (firstname.lastname@example.org), or John Lough, Jr. at (email@example.com) for more information on upcoming laws that may affect your workforce, including assessments of workers as either independent contractors or workers, scheduling a mandatory harassment training, or assessing and updating your workplace policies to ensure compliance with controlling law.
– Written by Denis Kenny