Reprint from Verdict Magazine – written by Cynthia Flynn. Volume II 2018.
The California Supreme Court’s landmark decision in Dynamex Operations West v. Superior Court, 4 Cal. 5th 903 (2018) threw out the 30-year old criteria established in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal. 3d 341 (1989) used to determine if a worker is properly classified as an independent contractor, or if they must be an employee.
The Dynamex “ABC” test simultaneously simplified the test and made it more restrictive for employers. Factor “A” requires that, to be a true independent contractor, the worker must be free from the hirer’s “control and direction,” which is not a great departure from similar factors under Borello. Factor “C” requires that the contractor ordinarily works in the trade for which the hirer is seeking her services, which again, is not a major change. Yet businesses must pay careful attention to Dynamex factor “B,” which holds that to be an “independent contractor, a worker must perform work “that is outside the usual course of the hiring entity’s business.” Id. at 955-57.
This spells potential trouble for certain app-based “gig economy” companies
This spells potential trouble for certain app-based “gig economy” companies, whose participants in their primary business are independent contractors. But it also may affect much smaller companies who rely on temporary or part-time labor to provide goods and services for customers.
In order to appreciate the nature of the change in law, it is important to examine Borello and some of the key cases interpreting it. In Borello, which was decided almost thirty years ago, the California Supreme Court listed the factors that were to be evaluated and balanced to determine whether employees are properly classified as independent contractors:
- whether the hirer can “control the manner and means” of accomplishing the work;
- if the worker is in a distinct occupation or business from the hirer;
- whether the type of work involved is typically done without supervision;
- the skills required work;
- who supplies the instrumentalities, tools, and locations of the work;
- whether the work is temporary or permanent in duration;
- whether the worker is paid by the hour or by the job;
- if the work is part of the regular business of the hirer; and
- whether the hirer and worker believe that the worker is an independent contractor.
Borello, 48 Cal. 3d at 350-51.
The “Control” Factor
The most important, and the most heavily litigated, of the Borello factors, was the “control” factor. Ayala v. Antelope Valley Newspapers, 59 Cal. 4th 522, 533 (2014), proclaimed that “control over how a result is achieved lies at the heart of the common law test for employment.” Yet that court clarified that “what matters under the common law is not how much control a hirer exercises, but how much control the hirer retains the right to exercise.” Id. (emphasis in original) (citing, e.g., Toyota Motor Sales U.S.A., Inc. v. Superior Court, 220 Cal. App. 3d 864, 875 (1990) (a hirer is considered to “control” the work if the hirer has the ability to fire the worker if he or she disobeys the hirer’s instructions).
In 2010, another California Supreme Court case addressed related – but not quite identical – questions regarding “joint employer” relationships. In Martinez v. Combs, 49 Cal. 4th 35, 50 (2010), seasonal agricultural workers alleged they were not paid minimum wage, and sued not only their direct employer, but also the merchants to whom the employer sold the strawberries the workers had picked. The question presented was whether the merchants could be liable for the alleged Labor Code violations as joint employers. Martinez discussed Borello at length, and ultimately determined that “to employ… has three alternative definitions. It means: (a) to exercise control over the wages, hours, or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.” Id. at 64. Based on this definition, the Martinez Court found the merchants were not the strawberry pickers’ employers. Id. at 78.
Enter Lee v. Dynamex. Defendant Dynamex provided same-day courier and delivery services, and employed drivers for this purpose. Dynamex, 4 Cal. 5th at 917. However, in 2004, Dynamex converted all of its employees to “independent contractors.” Id. From that point forward, Dynamex’s drivers had to provide their own vehicles and vehicle insurance, as well as to pay for their own gas, tolls, vehicle maintenance, and workers’ compensation insurance. Id. Dynamex continued to find and make arrangements with customers, set the rates for delivery, and assign drivers to routes. Id. Although the drivers were able to choose their own work days and the sequence in which they delivered packages on their assigned routes, the drivers had to notify Dynamex of their work days, and the drivers were liable for any failed deliveries. Id. at 918.
Plaintiffs, representing a putative class of drivers, moved for class certification of their Labor Code claims on the theory that they were misclassified as independent contractors, and should have been classified as employees. The trial court certified the class of drivers and denied defendant’s motion for decertification. Dynamex appealed the denial of decertification, and the case ultimately made its way to the California Supreme Court, which – purportedly – intended to resolve the question of whether the Martinez test applied to the misclassification issue as plaintiff argued, or whether defendant was correct that the multi-factor Borello test applied. Id. at 920-21, 941-42.
Ultimately, of course, the California Supreme Court chose neither, adopting a different standard from that of either Borello or Martinez, and upholding class certification.
For purposes of California wage orders
The Dynamex Court began by clarifying that its ruling applied to independent contractors “for purposes of California wage orders, which impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees.” Id. at 913-14 (emphasis added). The Wage Orders only apply to non-exempt employees – so the Dynamex decision does not apply to employees covered by exemptions – for example, doctors, lawyers, and teachers. In Dynamex, the IWC Wage Order that applied was number 9-2001 for the transportation industry. Id. at 914. That Wage Order – like many others – defines employment as “to suffer or permit to work.” Id. at 916, 925-26. But what did that phrase mean in real-life situations?
Plaintiffs argued for the Martinez test, and in particular, its “suffer or permit to work” definition. Yet, as defendant Dynamex pointed out, if “suffer or permit to work” was taken literally, it would apply to every single work situation – including those that are clearly independent contractor relationships. Id. at 948-49. To use an example, it would mean that anytime a hirer knew about the work and allowed it to happen, the worker would be an employee – even if the worker was a plumber, with his own business, who was hired to fix a leak in a grocery store’s bathroom.
Suffer or Permit to Work
The Dynamex Court did not apply the term literally, but found that “suffer or permit to work” is nonetheless relevant in distinguishing independent contractors from employees. Id. at 950. The Court also found useful Martinez’s language that employees should include “all individual workers who can reasonably be viewed as ‘working in the [hiring entity’s] business.’” Id. at 953 (quoting Martinez, 49 Cal. 4th at 69) (emphasis and brackets in original).) By contrast, an independent contractor – like a plumber hired for occasional repairs to facilities – “would have been realistically understood, instead, as working only in his or her own independent business.” Id. (emphasis in original).
Although some of the language in Martinez was instructive, the Court did not adopt the Martinez standard in its entirety. Yet it was also unconvinced that Borello correctly separated employees from contractors over the years. Id. at 953-55. The Court observed that Borello’s multi-factor balancing test made it difficult for both hirers and workers to know when the relationship was one of employment or of independent contract. Id. at 954-55. Not only did Borello leave both parties “in the dark,” the Court found it also enabled less well-intentioned employers to avoid complying with the wage and hour laws. Id.
Thus, choosing neither of the two options before it, the Dynamex Court reached outside California to adopt a test used in other jurisdictions, including Massachusetts, Delaware, and New Jersey – the “ABC” test. (Dynamex, 4 Cal. 5th at 956, n. 23 (citing Mass.G.L., ch. 149, § 148B; Del.Code Ann., tit. 19, §§ 3501(a)(7), 3503(c).); N.J. Stat. Ann. § 43:21-19(i)(6)(A-C)).). The ABC test begins with a critical presumption: that all workers are employees unless proven otherwise. And a hirer can only prove its workers are not employees if all three parts of the test are met. Id. at 955-56. Part “A” is a hirer’s control, which derives from the “suffer or permit to work” definition. Control is determined “in fact,” that is, as the company’s practices actually work, not just what the written contract provides. Id. at 958.
Factor “B,” however, asks whether the worker is working “in the hiring entity’s business?” Id. at 959 (citing Martinez, 49 Cal. 4th at 69). Although this factor was relevant to joint employment in Martinez, and was one of many factors that could be weighed under Borello (and could theoretically be ignored in favor of other factors), Dynamex has now made this factor mandatory. As the Court explained,
Thus, on the one hand, when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee. On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter by 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….
Id. at 959-960.
Moreover, Dynamex adopted the most stringent form of the ABC test as it exists in other jurisdictions. The New Jersey standard, for example, allows a hirer to meet “B” if either (1) the work is outside the usual course of the business, or (2) that the work performed is outside the places of business of the hiring entity. Id. at 956, n. 23. The California Supreme Court, however, noted that this would allow employers to designate people who worked remotely as independent contractors, even if they were working in the employer’s primary business. Id. Accordingly, Dynamex chose to adopt the more stringent version used in Massachusetts, in which the work must be outside the hirer’s usual course of business in order to qualify as an independent contractor relationship. Id.
Consequently, “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.” Id. at 960 (emphasis added).
Factor “C” is related to B, in that the nature of the worker’s business is once again critical. This factor requires the hirer to show that the worker is engaged in an independent trade or business. Id. at 960-63. In evaluating this factor, courts should look at whether the worker has taken “the usual steps to establish and promote” this business, including “through incorporation, licensure, [and] advertisements….” Id. at 962. Importantly, the worker cannot simply “volunteer” to be an independent contractor and waive employees’ legal protections, due to the concern that such “volunteers” displace employees. Id. at 960.
It is unclear at this time what overall impact the new “ABC” test, and especially B, will have on companies who have relied on independent contractors. The potential implications for the “gig” economy are apparent. Yet, as of 2015, studies across several states had found that approximately 10-20% of workers are misclassified. Francois Carre, “(In)dependent Contractor Misclassification,” Economic Policy Institute, June 8, 2015, available at: https://www.epi.org/publication/independent-contractor-misclassification/. Misclassification was even more prevalent in industries like construction, housekeeping, and trucking. Id. At least one commentator has wondered if franchisees’ employees could someday be considered employees of the franchisor under an expansive reading of Dynamex. See Tony Marks, “The California Supreme Court Deals a Blow to Independent Contractors.” Forbes, May 29, 2018, available at: https://www.forbes.com/sites/tonymarks/2018/05/29/the-california-supreme-court-deals-a-blow-to-independent-contractors/.
Meanwhile, post-Dynamex precedent has begun to evolve. Curry v. Equilon Enterprises, LLC, 23 Cal. App. 5th 289, 313 (2018), an opinion that was first issued in April 2018 but modified post-Dynamex, held that the Supreme Court in Dynamex did not intend the ABC test to apply to joint employer relationships. After all, Dynamex had expressly declined to adopt the Martinez standard to the independent contractor issue while appearing to leave Martinez in place for joint employer questions. Id.
In Lawson v. Grubhub, 15-CV-05128-JSC, 2018 WL 2735400, at *2 (N.D. Cal. June 7, 2018), following a trial regarding violation of the Labor Code, which included a determination of independent contractor status, the federal District Court stayed an order for plaintiff (as losing party at trial) to pay defendant’s Bill of Costs so that the Ninth Circuit could consider whether the Dynamex ABC test should apply. Id. The court viewed it as a “strong likelihood” that the Ninth Circuit would at least remand the case in light of Dynamex. Id.
Of course, if the Ninth Circuit in Grubhub does remand for application of the ABC test, that would mean that Dynamex’s provisions are retroactive, that is, whether past, pre-Dynamex independent contractor relationships may be evaluated by the courts using the ABC test. Whether Dynamex’s provisions are retroactive is an important open question, which no California appellate court (state or federal) has yet ruled on. If the courts do ultimately begin applying the ABC test retroactively, under Dynamex, many California workers will need to be reclassified as employees – and paid minimum wage, overtime, and provided with meal and rest breaks according to the California Labor Code.
If the Economic Policy Institute’s report, cited above, is correct that 10-20% of employees were misclassified before Dynamex changed the test to make it harder for hirers to classify their workers as independent contractors, it is possible that a significantly larger percentage of California workers are misclassified under the ABC test.
Regardless of whether Dynamex is held to apply retroactively, and regardless of how the ABC test is interpreted going forward, Dynamex is bound to have an impact on California businesses of all sizes and types. Therefore, it is advisable, if a business or lawyer advising a business is unsure about the countours of Dynamex and its interpretation going forward, to stay abreast of legal developments and to consult with an attorney specializing in employment law.