Dynamex Operations West, Inc. v. Superior Court – A Game Changer

On April 30, 2018, with its decision in Dynamex Operations West, Inc. v. Superior Court, No. S222732, the California Supreme Court made it significantly more challenging for employers to hire individuals as independent contractors.

Relevant Facts

Dynamex is a nationwide delivery service operating in California. In 2004, Dynamex converted its drivers from employees to independent contractors. The drivers continued to perform the same job duties; however, they now had to provide their own vehicles, pay all related operating expenses, maintain their own liability and workers compensation insurance, and pay all of their own taxes. Drivers were required to purchase a specific smartphone so Dynamex could track their location and provide clients with delivery estimates. Dynamex further required drivers to purchase and wear uniforms, and vehicle signage – although testimony showed that drivers didn't always wear the uniforms. Dynamex controlled what packages each driver delivered, however drivers could hire other drivers. Drivers set their own work schedules but had to let Dynamex know in advance when they would work. Drivers were not permitted to sub-contract with a competing delivery service. Drivers’ compensation was essentially based on the number of packages delivered.

The Plaintiff, Charles Lee, worked for Dynamex as a driver for 15 days in 2005. Three months later, he filed a class action lawsuit alleging various labor code violations on behalf of himself and other similarly situated drivers. An additional plaintiff was subsequently added.

The Trial Court agreed with Dynamex, which argued that S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 controlled the Dynamex – Driver relationship and applied the "right to control the manner and means of accomplishing the results" that is balanced with the other nine additional factors, holding that Lee and all other drivers were correctly classified as independent contractors, and the class should not be certified.

Plaintiffs appealed. The Court of Appeals reversed the Trial Court granting class certification. Dynamex appealed to the State Supreme Court.

The State Supreme Court affirmed class certification, finding that the class should include drivers, and provided a new “ABC Test” to determine whether a worker has been misclassified. The new test is based upon the IWC (Industrial Welfare Commission) Wage Orders and the California specific definition of “employee” and "employer" contained in the Wage Orders. The Wage Orders define employees and employers as those who "suffer or permit to work." As it relies upon the Wage Orders (which cover all California employees), Dynamex effectively replaces all other tests to determine whether a California based worker has been correctly classified as an independent contractor.

The "ABC Test"

The ABC Test starts with a rebuttable presumption, that all workers are employees unless each of the “ABC” elements are satisfied. The "ABC" elements are:

"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?

Impact

For California employers, Dynamex will likely significantly change how they hire. All workers are now presumed employees as they "suffer work" and their employer "permit(s) (them to) work.” In order for a worker to be classified as an independent contractor, employers must demonstrate that the worker satisfies all three “ABC” factors and that each "ABC” factor remains satisfied throughout the relationship.

It is noteworthy that while the Dynamex workers each had general business and workers compensation insurance (evidence of “C” of the “ABC Test”), that was not enough to establish an independent contractor relationship. In its analysis, the Supreme Court distinguished plumbers and electricians who provide short term independent contractor services and who are not part of their customers’ “usual course of business”, (evidence of "B" of the "ABC Test") from work-at-home seamstresses or cake decorators who, using materials and supplies provided by their employer, form an integral part of the employer's business (evidence of "C" of the "ABC Test"). Significantly, the Dynamex Court did not determine whether incorporation as either a stock or limited liability company was enough, within itself, to create an independent contractor relationship.

Dynamex will undoubtedly result in a dramatic increase in misclassification claims by both current and former independent contractors. Claims will likely include allegations of unpaid overtime, minimum wage violations, meal and rest breaks, paystub violations, and workers' compensation insurance, and may also include claims for Unfair Competition for violation of Business and Professions Code 17200, and Private Attorneys General Act (PAGA), or class action claims brought on behalf of other similarly situated workers.

Claims for unpaid wages, meal and rest breaks, and paystub violations can be brought before the California Department of Industrial Relations and the Department of Labor Standards Enforcement, which, after an administrative hearing, can award monetary penalties against employers, which are enforceable judgments.

As of January 1, 2018, the Labor Commissioner’s Office may expand any worker complaint and investigate claims of employer retaliation or discrimination. Where an investigation finds it likely that retaliation has occurred, the Labor Commissioner’s Office is empowered to petition the Superior Court for a temporary injunction to stop the unlawful retaliatory or discriminatory conduct. The standard that must be met for such injunctive relief has also been lowered. Temporary injunctive relief, such as reinstatement, will be granted upon a showing that "reasonable cause exists to believe a violation has occurred." See Labor Code §§ 98.7, 98.74, 1102.61, 1102.62. In addition, the Labor Commissioner’s Office may issue citations directing specific relief to persons determined to be responsible for violations, and subject employers who willfully refuse to comply with civil penalties.

In addition to misclassification claims from independent contractors, employers are subject to liability stemming from payroll tax audits conducted by the California Employment Development Department (EDD). The EDD is empowered to conduct payroll tax audits of businesses operating in California to ensure workers receive benefit coverage. During an audit, it is the business's burden to demonstrate by way of appropriate documentation that every worker going back three years has not been misclassified. Proof often requires that employers demonstrate that the individual operates a separate business. Following Dynamex, this will require more than the worker having his/her own general business and workers compensation insurance, an EIN number, and a separate bank account.

Recommendations

It is strongly recommended that all California businesses review their existing independent contractor agreements and relationships to ensure compliance with Dynamex. Employers conducting business in the new “gig economy” should be cautious when engaging independent contractors and consider hiring temporary employees. Alternatively, individuals should be encouraged to form corporations with an S-Election or limited liability companies and enter into written contracts for services with the new company.

This e-Bulletin was prepared by Douglas M. Wade of The Law Offices of Douglas M. Wade, PLC and a former Co-Chair of the Corporations Committee of the Business Law Section.