The Dynamex Ruling

In a landmark decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Charles Lee), the California Supreme Court adopted a new legal standard for determining whether workers should be classified as employees or as independent contractors for purposes of California wage orders promulgated by the Industrial Welfare Commission (IWC). (Wage orders 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) for California employees.) The Court adopted the “ABC” test, utilized by other jurisdictions, which ultimately makes it much more difficult for businesses to classify workers as independent contractors.

The “ABC” test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring entity demonstrates that the worker in question satisfies all of the following three conditions:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact;

(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 that involved in the work performed.

The Supreme Court also clarified that it interprets this standard as placing the burden on the hiring entity to establish that the worker is an independent contractor by proving that the worker meets each of the three ABC factors.

Background on the Dynamex Case

Dynamex Operations West, Inc. (Dynamex) is a nationwide package and document delivery company. Prior to 2004, Dynamex classified its California drivers as employees, but in 2004, the company converted all drivers from employees to independent contractors. In 2005, Plaintiff Charles Lee entered into an independent contractor agreement with Dynamex to provide delivery services for the company. In April 2005, three months after ending his work with Dynamex, Lee filed this lawsuit on his own behalf and on behalf of similarly situated Dynamex drivers, alleging that Dynamex’s misclassification of its drivers as independent contractors led to Dynamex’s violation of the provisions of IWC wage order No. 9, the applicable state wage order governing the transportation industry, as well as various sections of the Labor Code.

After an earlier round of litigation in which the trial court’s initial order denying class certification was reversed by the Court of Appeal, the trial court ultimately certified a class of Dynamex delivery drivers. The trial court’s certification order relied on Martinez v. Combs, 49 Cal. 4th 35 (2010), which held that “employ” 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. Martinez, 49 Cal. 4th at 64.

Upon appeal, the Court of Appeal ruled that the wage order definitions discussed in Martinez are applicable to the employee or independent contractor question with respect to obligations arising out of wage orders. The Court of Appeal upheld the trial court’s class certification order with respect to all of plaintiffs’ claims that are based on alleged violations of wage orders. At the same time, the Court of Appeal concluded that insofar as the causes of action in the complaint were not governed by wage orders, the Borello standard is the applicable standard for determining whether a worker is properly considered an employee or an independent contractor.

S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989) was previously viewed as the seminal California decision on independent contractor classification. The Borello test’s principal factor is “whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired,” which should be considered in addition to the following nine additional factors: (1) right to discharge at will, without cause; (2) whether the one performing the services is engaged in a distinct occupation or business; (3) the kind of occupation, with reference to whether in the locality the work is usually done under the direction of the principal or by a specialist without supervision; (4) the skill required in the particular occupation; (5) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (6) the length of time for which the services are to be performed; (7) method of payment, whether by the time or by the job; (8) whether or not the work is part of the regular business of the principal; and (9) whether or not the parties believe they are creating the relationship of employer-employee.

Dynamex then filed a petition for review challenging the Court of Appeal’s conclusion that the wage order definitions of “employ” and “employer” discussed in Martinez are applicable to the question whether a worker is properly considered an employee or an independent contractor for purposes of the obligations imposed by an applicable wage order, which this week’s Supreme Court ruling addresses.

What the Dynamex Ruling Means for Employers

This decision is a seismic shift in the law regarding independent contractor/employee classification. The Supreme Court is placing the burden on businesses to defend their classification of workers as independent contractors, according to the above “ABC” factors. While factor A (“worker is free from the control and direction of the hirer in connection with the performance of the work . . .”) is similar to the formerly applied Borello test, factors B and C are likely much more difficult for employers to establish for their workers currently classified as independent contractors.

The Supreme Court provided the following example for factor B (“the worker performs work that is outside the usual course of the hiring entity’s business”). When a retail store hires an outside plumber to repair a leak in a bathroom on its premises, the services of the plumber are not part of the store’s usual course of business, and the plumber meets factor B for independent contractor classification. However, 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 a bakery hires a cake decorator, factor B is not met.

Factor C (“the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed”) limits independent contractor classification to an individual who “independently has made the decision to go into business for himself or herself.” A worker who meets factor C “generally takes the usual steps to establish and promote his or her independent business—for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.”

It is not clear from this ruling whether the “ABC” test applies to claims brought by workers that do not arise from Wage Orders (e.g., claims for reimbursement for business expenses that arise from California Labor Code section 2802). However, businesses operating in California that treat any of their workers as independent contractors should re-evaluate the classification of their workers according to the “ABC” test to ensure full compliance with the law. If a worker is classified as an employee, the employer bears the responsibility of paying Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing workers’ compensation insurance and complying with state and federal statutes governing the wages, hours and working conditions of employees. Consequently, misclassification of workers can result in significant legal exposure with respect to wage and hour compliance.