Employee or Independent Contractor? Simple as A-B-C

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On April 30, 2018, the California Supreme Court issued its long-awaited ruling in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County, No. S22732, 2018 WL 1999120 (April 30, 2018) (slip op. available here). Dynamex announced a new test under California law to determine whether workers are properly classified as independent contractors rather than employees and, in so doing, adopted the “ABC test,” a standard that should make class certification of misclassification claims more likely. The ruling will also presumably result in findings that many “independent contractors” are currently misclassified and, therefore, are entitled to the rights and benefits of California’s wage orders. These important benefits include the right to minimum wage, overtime, meal and rest breaks, and, depending on the wage order in question, reimbursement for certain business expenses.

In Dynamex, the plaintiffs alleged that Dynamex, a nationwide package and document delivery company, had improperly misclassified its delivery drivers as independent contractors rather than employees. The drivers claimed that the misclassification led to Dynamex’s violation of the provisions of Industrial Welfare Commission Wage Order No. 9, the applicable state wage order governing the transportation industry, and various sections of the Labor Code. Id. at 3. Then, the plaintiffs moved for class certification. The trial court granted certification of a class consisting of “Dynamex drivers who, during a pay period, did not themselves employ other drivers and did not do delivery work for other delivery businesses or for the drivers’ own personal customers.” Id. at 4. In certifying the class, the trial court determined that the applicable standard for determining whether the drivers were employees was the test announced in Martinez v. Combs, 49 Cal.4th 35 (2010), which held that “[t]o employ . . . under the [wage order], has three alternative definitions[:] (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.” 49 Cal.4th 35, 64.

Thus, the trial court rejected Dynamex’s argument that the multi-factor test from S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), governs the independent contractor analysis rather than the Martinez test. Dynamex at 4. Dynamex had claimed that the Martinez wage order definitions are relevant only to the joint employer question that was directly presented in Martinez—namely, whether, when a worker is an admitted employee of a primary employer, another business or entity that has some relationship with the primary employer should properly be considered a joint employer of the worker and therefore also responsible, along with the primary employer, for the obligations imposed by the wage order. Id. at 5. Dynamex then appealed the trial court’s order of certification. The Court of Appeal affirmed, concluding that the wage order definitions discussed in Martinez are applicable to the “employee or independent contractor” question with respect to obligations arising out of the wage order, and not just to joint employer determinations. The Court of Appeal upheld the trial court’s class certification order with respect to all of plaintiffs’ claims based on alleged violations of the wage order. Id.

Dynamex filed a petition for review, and the California Supreme Court granted review. In rendering a unanimous decision, the court extensively analyzed the relevant wage orders and judicial decisions and announced a new test for determining whether a worker is to be classified as an employee or independent contractor. The court interpreted the “suffer or permit to work” standard in California’s wage orders as: (1) placing the burden on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the wage order’s coverage; and (2) requiring the hiring entity, in order to meet this burden, to establish each of the three factors embodied in the ABC test—namely (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. Id. at 57, n20. Further, the court held that the hiring entity’s failure to satisfy any one of the three parts itself establishes that the worker should be treated as an employee for purposes of the wage order. Id. at 76. The court also provided guidance as to case management, commenting that a trial court is free to consider the separate parts of the ABC standard in whatever order it chooses and that, in terms of increased clarity and consistency, courts will often be best served by first considering one or both of the latter two parts of the standard (i.e., B and C) in resolving the employee or independent contractor question. Id.

Dynamex streamlines the employee/contactor analysis because only one prong may need be analyzed, simplifying the theory of liability and making certification far more probable. For example, in many cases, the plaintiff can focus on part B of the ABC test to argue that there is sufficient commonality of interest regarding the question whether the work provided by the workers is outside the usual course of the hiring entity’s business to permit the plaintiff’s claim of misclassification to be resolved on a class basis. If so, the class will be certified and the merits of the case hinge on an analysis of this single question. In fact, that is exactly how the California Supreme Court applied its new legal standard to the facts in Dynamex and accordingly affirmed the trial court’s certification order. Id. at 78-82. The state Supreme Court also analyzed part C of the ABC test and found a sufficient commonality of interest as to whether the drivers in the certified class are customarily engaged in an independently established trade, occupation, or business to permit resolution of that issue on a class basis. Id. at 81.

The significance of Dynamex on independent contractor misclassification claims in California cannot be overstated. Dynamex should also increase the likelihood that plaintiffs will prevail on the merits given that the work performed by the “contractors” is frequently part of, or even critical to, the hiring entities’ business. For example, it is now difficult to imagine that delivery drivers would not be employees for any company with a business model that centers on, or includes, the delivery of products. Whereas workers such as plumbers, electricians, and other trade workers would properly be classified as independent contractors, given that they are customarily engaged in business distinct from the hiring entity. Many companies, especially those part of the gig economy, rely on the use of independent contractors as key to their business model, since it would be much more expensive to provide benefits and rights to which an employee would be entitled. It is now clear that many of those companies will need to make dramatic changes to their workforce to comply with California law.

Authored By:
Robert Drexler, Senior Counsel