I. Executive Summary
Sometimes, things are not as easy as A-B-C.
Assembly Bill (AB) 5, currently pending in the California legislature, would impose the “ABC” test on California businesses and workers, dramatically altering the legal standards applied in evaluating whether a worker is an employee or an independent contractor. If AB 5 is enacted in its current form, on January 1, 2020, approximately two million independent contractors in California could be considered employees under state law. The state’s workplace laws and regulations along with local city laws and rules will then apply to these newly classified workers, and give rise to potential back pay claims for misclassification. Employers will face very difficult choices, many of which are not appealing.
Employers doing business in California have expressed concern and anxiety about the future of AB 5, and the future of the Golden State’s economy should this bill become law. AB 5 has been aptly described as the most significant employment law issue facing California businesses today.
To provide guidance and assistance to employers that do business in California, Littler’s Workplace Policy Institute® (WPI™) has established an AB 5 Task Force (the Task Force) of employment law attorneys with subject matter experience in independent contractor, wage and hour, workers’ compensation, unemployment compensation, and employment tax law. This Task Force has undertaken an in-depth analysis of AB 5, evaluated its potential consequences, developed practical suggestions for our clients on potential compliance options and strategies, and brainstormed ideas and solutions to chart a better way forward.
While this report is one result of their efforts, it is only a start. WPI looks forward to participating further in the development of this critically important employment law issue.
The California economy—the fifth largest economy in the world—is at a crossroads. We are experiencing the longest period of sustained economic growth in several generations.
A substantial part of that growth is due to innovative business models that combine new ideas, technology and talent to invent something new. Many of these new business models did not exist prior to the recession of 2007-2009. The innovative environment in which California businesses operate played a large part in turning the state’s economy around, putting the state on the road to economic recovery and growth.
Virtually every segment of the economy in the Golden State has been transformed in the last 10 years. Businesses have rapidly adopted machine learning, artificial intelligence and robotics to increase efficiency and spur growth. Our modern economy is providing consumers with never-before-experienced convenience and on-demand functionality. In 2019, the world of work is profoundly different from that experienced just a few years ago. And that world of work is changing more and more each day.
Based on this description, it would seem that our economy is humming along on a super highway. But indeed we are, at this moment, paused at a crossroads: the intersection of our modern economy and AB 5.
AB 5, currently under consideration by the California legislature, seeks to answer a particularly complicated question with a test that is supposed to be as simple as A-B-C. That question is—whether a particular person, doing a particular task, is to be classified as an employee, or as an independent contractor. The question encompasses virtually every aspect of California labor and employment law: hours of work, wages, income tax, unemployment insurance, workers’ compensation, mandatory sick leave, and more.
The question is of substantial importance not just to the novel business models of our modern, digital economy, but also to more traditional businesses and their workers: dance studios, interpreter services, real estate appraisers, freelance copywriters, and so forth. Further, the question obviously impacts those currently classified as contractors as well, individuals who value the freedom and entrepreneurial spirit that contracting brings, as well as more mundane aspects of the status, such as the ability to claim business expenses on their tax returns.
AB 5’s approach is to take a wide swath of California workers and transform them, possibly retroactively, from independent contractors to employees. This would take our modern, digital economy and return it to a set of rules, many of which were developed at the beginning of the Industrial Revolution.
The consequences of this transformation are not wholly unknown. Lessons can be learned from other states that have adopted the ABC test. In those states, lawsuits have not gone away. They continue unabated, still asking the fundamental question: is this worker an employee or an independent contractor? Adoption of the ABC test in California will not be the end of the debate, but rather, the beginning of a new debate, which will be played out in our courthouses.
This transformation could also have a dramatic impact on the economic future of the Golden State. Our current period of sustained economic growth simply cannot last forever. In the past, growth periods have been halted by events such as the bursting of the dot-com bubble in 2000, or the subprime mortgage crisis of 2007. It is not beyond reason to suggest that passage of AB 5 and the sweeping uncertainty and litigation that invariably will result, could be a tipping point that may have a substantial impact on the California economy.
A more careful and measured approach to answering these far-reaching questions is called for. The complex legal and economic issues presented by the current independent contractor-employee debate simply are not subject to an easy solution. It is not as easy as A-B-C.
The challenge of maintaining modern employment laws is not new. In 2008, the California Labor Commissioner observed: “The technology explosion in the last 20 years has often outpaced the ability of federal and state governments to keep up with private industry advances in conducting business.”1 The observation was astute then, and remains equally so today.
This report will 1) review the history of California law regarding worker status; 2) review the key provisions of AB 5; 3) evaluate the ABC test; 4) discuss the possible impacts of adoption of the test in California; 5) provide practical suggestions and guidance for California businesses in adapting to the new test; and 6) conclude with the Task Force’s recommendations for a different path forward.
III. California Law: Independent Contractors
A. The evolution of the test used to determine worker status prior to April 30, 2018
To understand the significance of what AB 5 intends to do, it is instructive to examine the history of worker classification law in California.
In the agrarian economy that was quickly being left behind by the Industrial Revolution at the turn of the 20th century, status was perhaps self-evident based on longstanding social norms and the clear division of labor: everyone knew who was the master and who was the servant. Since master/servant law was being used to create employment laws for the newly forming industrial society, the differences between employers and wage earners might also have seemed self-evident.
It may be for this reason that there were no definitions of an “employee” in most of the employment laws that were enacted even as late as the 1930s. For example, the Social Security Act (SSA), National Labor Relations Act (NLRA), and the Fair Labor Standards Act (FLSA) all failed to define an “employee” when they were originally enacted. Rather, the term was colored by the organizational structures and philosophies of the times, as well as what the laws were attempting to achieve.
The United States Supreme Court noted in one early case that addressed whether “newsboys” were employees under the NLRA: “The word [employee] is not treated by Congress as a word of art having a definite meaning. Rather it takes color from its surroundings in the statute where it appears, and derives meaning from the context of that statute, which must be read in the light of the mischief to be corrected and the end to be attained.”2 In reading the meaning of the word from the surroundings, the Court made the law regarding who is, and who is not, an employee.
Shortly after the SSA was enacted in 1935, the United States Treasury Department promulgated regulations that adopted the common-law control test to determine whether a worker was an employee or an independent contractor for Social Security tax purposes.3 Cases defining the contours of the definition of an employee under the SSA were found persuasive for purposes of the FLSA and other social laws.4 Despite the lack of any actual definition, “at the time the [SSA] was adopted there was no doubt or dispute or question that ‘employee’ in the [SSA] had its usual common-law meaning.”5
California’s governor approved the California Unemployment Insurance Act (CUIA) on June 25, 1935. This law anticipated and preceded the SSA (which along with Social Security enacted the federal unemployment system) by two months, and thus “the legislature took notice of the terms of the pending bill, generally, and caused state law to conform to the requirements of federal law if the same should be enacted.”6
Similar to the SSA, the CUIA did not originally contain a definition of an “employee.” The phrase “the usual common law rules” were not codified until 1971, but had the same meaning as used under federal employment tax law since inception. For example, in 1946 in Empire Star Mines Co. v. California Employment Commission,7 the California Supreme Court explained that, when determining if a worker is an employee or independent contractor for unemployment insurance tax purposes, “the most important factor is the right to control the manner and means of accomplishing the result desired. If the employer has the authority to exercise complete control, whether or not that right is exercised with respect to all details, an employer‑employee relationship exists.”8
The common law control test remained the primary test used to determine worker status for all purposes in California from at least 1946 until 1989, when the California Supreme issued its opinion in S.G. Borello & Sons, Inc. v. Department of Industrial Relations.9 In Borello, the court explained, “the distinction between employees and independent contractors arose under the common law rules to limit one’s vicarious liability for a person rendering service to him.”10 This court pointed out that federal cases drew distinctions between tort policy and social legislation that justified “departures” from common law principles when dealing with statutes protecting “employees.”11 Accordingly, the court found that “[w]here not expressly prohibited by the legislation at issue,” the federal courts had considered the social purpose of the legislation to expand the definition of an employee, and cited several federal cases for this proposition.12 Therefore, because the Legislature had not limited and constrained the Worker’s Compensation Act to “the usual common law rules,” the Borello court was able to adopt additional factors from the “economic reality” test used under the Fair Labor Standards Act for purposes of the Workers’ Compensation Act.13
In adopting an expanded test under the concept of economic realities, the Borello court found that “the usual common law rules” “must be supplemented in compensation cases by consideration of the remedial purpose of the statute,” adding “We agree that under the Act, the ‘control-of-work-details’ test for determining whether a person rendering service to another is an ‘employee’ or an excluded ‘independent contractor’ must be applied with deference to the purposes of the protective legislation.”14 The Borello court did caution that “[w]e adopt no detailed new standards for examination of the issue [of a worker’s status].”15
Since Borello, California courts and various state agencies had applied the economic realities or “Borello” test to determine whether a worker is an independent contractor or employee for most purposes.16 As explained, the Borello test starts with the usual common law rules, but then supplements them by considering the remedial purpose of the statute along with a number of “secondary” factors, including whether the worker was engaged in a distinct occupation or business, or is integral to the business, the level of economic dependence the worker has upon the principal, the skill required in the particular occupation, and whether the worker or the hiring entity supplied the tools used to perform the work and the place where the work was performed.
B. Dynamex shifts the landscape of independent contractor law in California
The California Supreme Court on April 30, 2018, abandoned the Borello test in favor of the ABC test17 for purposes of the wage orders, which provide minimum wage, maximum hour, and working condition requirements for specific industries. The wage order at issue in Dynamex Operations West v. Superior Court18 imposes wage and hour obligations for non-exempt employees in California. Section 2 of the wage order contains the following definitions:
(E) “Employ” means to engage, suffer, or permit to work.
(F) “Employee” means any person employed by an employer.
(G) “Employer” means any person as defined in Section 18 of the Labor Code, who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person.
At issue in the case was the meaning of the term “employ,” and more specifically, what engage, suffer, or permit to work means. In seeking to define these terms, the court held that the broadest possible interpretation should be given, and thereafter adopted Massachusetts’ version of the ABC test. Under this ABC test, workers are presumed to be employees unless all three of the following conditions are met:
(A) The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
(B) The service is performed outside the usual course of the business of the employer; and
(C) The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.19
Under the first prong, it is the right of control rather than the exercise of control that is legally determinative. Further, the lack of control must exist both in contract and in practice.20 To a large extent, this is the control aspect of the Borello test.
The second prong does away with the “place of business” exemption found in most ABC tests; one must show that the worker’s job is independent, separate and distinct from the company’s business, and not a regular or continuous part of the business.21 The court described this prong as addressing “workers whose roles are most clearly comparable to those of employees ….” It then provides the following examples:
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 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.22
The last prong asks whether the person is the impetus for being self-employed, exhibiting indicia of a business such as incorporation, licensure, advertisements, or routine offerings to provide the services of the independent business to the public or to a number of potential customers.23
Taking the three prongs together, the new standard means that a business cannot engage an individual as an independent contractor unless he or she has already established some kind of independent business to provide services to the general public that are unrelated to the firm’s own usual business.
C. Dynamex might be retroactive
On May 2, 2019, the U.S. Court of Appeals for the Ninth Circuit issued its opinion in Vazquez v. Jan-Pro Franchising International, Inc. (Vazquez).24 The Ninth Circuit concluded Dynamex applies retroactively. In reaching its decision, the Ninth Circuit expressly relied on the California Supreme Court’s “emphasis in Dynamex” that its holding was “a clarification rather than as a departure from established law.”
On July 22, 2019, however, the Ninth Circuit reversed course and issued a single-page order: (1) granting panel rehearing in Vazquez; (2) withdrawing the court’s previously published opinion; and (3) declaring the court’s intention to file “[a] revised disposition and an order certifying to the California Supreme Court the question of whether [Dynamex] applies retroactively.”25
The Ninth Circuit’s revised decision gives the California Supreme Court a second opportunity to address retroactive versus prospective application of its opinion in Dynamex. However, the Supreme Court may not act on this opportunity expeditiously. AB 5 as currently worded does not address the question of retroactivity. Until either the Supreme Court or the legislature acts, California businesses will have to look to the state’s trial courts and appellate courts for clarification of this important question.
IV. AB 5
A. Basic provisions of the bill
AB 5 is a proposed legislative “fix” to Dynamex. The present text of AB 5 consists of three parts: (1) express adoption of the ABC test; (2) exceptions to the first part; and (3) a statement of intent to separately address workers’ compensation issues by future amendments to existing law.
B. Adoption of the ABC test
The bill would add Labor Code section 2750.3, which expressly adopts the ABC test for purposes of the Labor Code, Unemployment Insurance Code, and California Wage Orders. The bill’s statement of the three elements of the ABC test is identical to the language in the Dynamex opinion. Notably, the bill goes beyond the scope of the Dynamex decision, which applied the ABC test for purposes of the California Wage Orders only.
The bill creates a number of exceptions for certain workers and situations. For the vast majority of these exceptions, if the applicable criteria are met, the Borello test instead of the ABC test will apply. For a small number of the exceptions, meeting certain criteria will cause other tests to apply.26
The proposed exceptions have been the most hotly debated aspect of the bill. The list has been amended numerous times to add new exceptions and to revise existing ones. Further amendments are expected. At present, the exceptions can be broken down into four categories, as follows:
1. Specific occupations27
The bill lists seven occupations to which the Borello test will apply. Specifically:
- Insurance brokers;
- Physicians and surgeons;
- Securities broker-dealers, investment advisors, and their agents;
- Direct sales salespersons as described in section 650 of the Unemployment Insurance Code;
- Real estate licensees;
- Hairstylists, barbers, electrologists, estheticians, and workers providing natural hair braiding;28
- Workers performing repossession services for repossession agencies.
2. Service providers29
The apparent goal30 of this exception is to allow an individual or entity (the “contracting business”) to receive services from a worker employed by another individual or entity (the “service provider”), yet have the worker’s relationship with the contracting business be governed by the Borello test. In order to fall within the exception, the contracting business must demonstrate that 12 criteria31 are satisfied. Several of these criteria are problematic, for four reasons.
First, it will often be difficult for the contracting business to conclusively verify that the service provider actually maintains a separate business location, is “customarily engaged in an independently established business of the same nature as that involved in the work performed,” contracts with other businesses to provide the same or similar services, and maintains a clientele independent of the contracting business entity. On these issues, the contracting business must largely rely on the representations of the service provider. The bill does not address under what circumstances the contracting business may be held liable where the service provider’s inaccurate representations result in non-compliance with these criteria.
Second, several of the criteria are not within the control of the contracting business. The service provider controls whether it possesses a business license (if required by the jurisdiction in which the work is performed), advertises its services to the public, maintains a clientele independent of the contracting business entity, and maintains a separate business location. The bill does not specify under what circumstances the contracting business will be held liable where the actions or omissions of the service provider result in non-compliance with these criteria.
Third, the criterion that the service provider have “no other financial relationships with the contracting business” is vague. The statute does not provide any guidance regarding which “financial relationships” would violate this criterion.
Fourth, several criteria are subject to change over time. The service provider may lose its business license, close its separate business location, cease advertising to the public, and lose its contracts with other businesses. These lapses may result in temporary or permanent failure to satisfy the corresponding criteria of the exception. These lapses may be inadvertent or occur despite the service provider’s best efforts (such as loss of other clients), or may be a deliberate lapse intended to fail the exemption under AB 5. The statute does not specify: (1) whether lapse of criteria will result in retroactive, temporary, or permanent loss of the exception; or (2) whether and to what extent the contracting business will be held liable.
3. Contracts for professional services32
The apparent goal of this exception is to allow an individual or entity (the “hiring entity”) to receive “professional services” from an individual or entity (the “individual”) yet have the relationships with the persons and entities to whom they are providing services be governed by the Borello test. Notably, the reference to the professional as the “individual” does not mean the professional must provide services as an individual—the individual may provide the services through a sole proprietorship or business entity.33
To fall within this exception, the services must first fall within the bill’s proposed definition of “professional services,” defined as “services that meet any of the following” four categories:
- The services require an active license from the State of California and involve the practice of one of the following recognized professions: law, dentistry, architecture, engineering, podiatrists, veterinarian, private investigation, or accounting.34
- The services require possession of an advanced degree that customarily involves a prolonged course of specialized intellectual instruction and study in the field of marketing or the administration of human resources from an accredited university, college, or professional school, as distinguished from a general academic education.35
- The services are performed by a freelance writer who does not provide content to any one publication more than 25 times per year. This item is subject to additional sub-criteria.36
- The services are provided by “fine artists, professional grant writers, and graphic designers.” This item is also subject to additional sub-criteria.37
The current text does not expressly place the burden on the hiring entity to demonstrate that the services meet the criteria of these categories.38
Notably, the bill currently states, “‘[p]rofessional services’ does not include professionals engaged in the fields of health care and medicine.”39 This language is inconsistent with the provisions specifically including dentists and podiatrists within the scope of the first category of professional services, above.
If the services fall within the above requirements, the hiring entity must demonstrate that nine criteria40 are satisfied. Many of these criteria are also problematic, for the same reasons discussed above regarding the criteria for the exception for service providers.
4. Construction industry41
This exception appears calculated to allow an individual or entity (the “contractor”) to receive services from an individual performing work (the “individual”) pursuant to a contract in the construction industry, yet have the relationship between the contractor and the individual governed by the Borello test.
Unlike the other exceptions, described above, this exception does not specify whether the individual performing services may do so through a sole proprietorship or other business entity. However, the remaining text of the exception suggests this would be allowed. Specifically, the enumerated criteria for the exception refer to a “subcontractor.” If the individual and the subcontractor are construed as different persons/entities, then the exception allows the individual to provide services through a third party.
In order to fall within this exception, the contractor must demonstrate that eight criteria42 are satisfied. Many of these criteria are also problematic, for the same reasons discussed above regarding the criteria for the exception for service providers.
D. Intent to separately address workers' compensation laws
The bill contains only one very narrow provision directly addressing workers’ compensation. Specifically, if real estate licensees are not subject to section 10032 of the Business and Professions Code, then their classification for workers’ compensation purposes shall be governed by Labor Code section 3200, et seq.43 This provision does not appear to alter existing law.
Rather, the bill amends Labor Code section 3351 to add the following statement: “It is the intent of the Legislature to amend the law to address workers’ compensation and the holding in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903.” It appears those amendments, if any, will be made by legislation other than AB 5.44
E. Status as of August 8, 2019
AB 5 continues to progress. It has made it out of the Assembly, into the Senate, and its next stop is the Senate Appropriations Committee. There are several possible further amendments to the bill that could result from the ongoing debate.
During the most recent committee hearing, on July 10, 2019, members of the California Senate Labor, Public Employment, and Retirement Committee (Committee) expressed several concerns regarding the current text of AB 5.45 Committee Chair Senator Jerry Hill and Committee Vice Chair Senator Mike Morrell spoke on this subject in detail. Of particular note, the bill’s author, Assembly member Lorena Gonzalez—along with members of the Committee—expressly contemplated extensive revisions to AB 5.
The Committee’s concerns included:
Consideration of potential alternatives to the Borello test: The Committee’s written analysis of the bill expressed sharp criticism of the AB 5’s application of the Borello test to workers falling within the bill’s various exceptions. The Committee wrote:
Essentially, the bill is saying, “if your workers were independent contractors before Dynamex, then they can continue to be independent contractors under Assembly Bill 5.” That said, by retaining the Borello test, these occupations remain in the messy muddle of a failed employment test that met the needs of neither employers nor workers. Should Assembly Bill 5 become law, the Legislature will need to revisit the remnants of Borello in the future.46
(Emphasis in original.)
Need for revisions to exceptions: Committee members claimed the business-to-business exceptions require additional work. Sen. Hill noted the temptation to ensure independent contractors are charging twice the minimum wage is understandable, but would be difficult to administer and enforce. He expressed concern that several criteria for the exceptions are outside the hiring entity’s control. He proposed focusing not on the rate paid, but on whether the person performing the work truly has the power to set his or her own rates. He opined that companies that allow “true” rate-setting should be allowed to continue contracting with workers as independent contractors.
Workers’ compensation: Sen. Hill also expressed concern regarding the workers’ compensation implications of AB 5. He opined that it would be illogical to apply wage and hour law, but not workers’ compensation law, to a worker. However, he recognized that any change to workers’ compensation laws would require careful consideration and time that may not be available during this legislative session.
Implementation: Committee members noted any legislative solution should avoid abrupt change. Sen Hill proposed that any major shift occur over time.
Trucking Owner-Operators: Nearly every member of the Committee commented on the plight of trucking owner-operators. All appeared to agree that the bill should contain explicit recognition of legitimate owner-operators.
Avoiding retroactive liability under Dynamex: The Committee expressed that the retroactive implications of Dynamex must be equitable and just. Sen. Hill stated that a legislative solution should protect businesses that were following the law as it existed at the time.
Transparency: Sen. Hill and Sen. Morrell requested increased transparency regarding selection of certain occupations and situations for exceptions.
In sum, most members of the Committee voted to pass AB 5, with the understanding that legislators would work with each other and stakeholders to resolve the above issues before the Senate votes on it. In her own closing comments, Assembly member Gonzalez acknowledged that the Committee probably would not address every situation in the time allotted, and anticipated the legislature would be working on this issue “for a few years.”47
V. The ABC Test is Unworkable
AB 5 is designed to codify, clarify and simplify the Dynamex decision. Despite those positive intentions, the test suffers from critical deficiencies. The legislation creates winners and losers without a rationale as to why some occupations and industries fall on one side of the equation or the other. Even when an exemption is crafted, definitional issues will arise as to whether a particular situation fits the exemption. Further, exemptions carry with them additional burdens of justifying the exclusion.
Moreover, the ABC prongs are anything but clear. The principal sponsor admits more years of work remain to refine the bill. Rushing to enact flawed legislation now will put jobs at stake in the interim.
AB 5, for the reasons discussed below, needs work.
A. Analysis of the A, B and C prongs
While under the ABC test an employer must demonstrate that the three prongs are met, each prong is not really capable of being reviewed in complete isolation. For example, whether control exists under the A prong is likely to be colored by both the B prong (service performed outside the usual course of business) and C prong (independent, established business). If the worker’s business is really different from the principal’s business, it may be difficult or impossible to actually control the manner and means by which services are performed. Further, if the worker has its own bona fide business, equipment, employees, etc., the work performed may be controlled more by the existence of such factors. Thus, contrary to claims that the ABC test is “easier” to use to establish an employment relationship, in reality, it suffers from the same kind of multi-prong analysis that exists under both the common law and Borello tests.
1. The "A" prong is similar to the control factor of the Borello test
The “A” prong of the new test is similar to the usual common law control test and the control aspect of the Borello test because it looks at whether “control” exists, both in contract and reality. In this sense, it is not particularly new or different from what already existed. If a business could not pass the control test or the control aspect of the Borello test, it would likely not pass the “A” prong of the ABC test either. So to some extent that “A” prong should be the threshold for determining status regardless of whether the ABC test, Borello test or usual common law rules control test apply, and any failure to satisfy it should strongly suggest an employment relationship.
2. The "B" prong is unclear because it is difficult to define a "business"
The crux of the problem with the ABC test’s B prong is that it assumes everyone knows and can define the business. The Dynamex court described the B prong as addressing “workers whose roles are most clearly comparable to those of employees …”
For purposes of tax law, whether a trade or business exists usually arises in the context of whether certain expenses are deductible as ordinary and necessary business expenses under IRC section 162, as opposed to personal expenses (or unnecessary and extraordinary expenses) for which no deduction is allowed. The Social Security Act, which created the federal-state unemployment system and imposes upon the states a number of requirements to receive federal funding, states “the term ‘business’ means a trade or business (or a part thereof).” The term “business” is not defined by the ABC test or in the Dynamex opinion. Defining a term with the term itself is not very useful.
The ordinary meanings of the term “business” are quite varied.48
These different definitions are also not helpful, insofar as they do not tell us what the term means for wage and hour or unemployment purposes. Cases from Massachusetts49 have explained that in looking at how to define the usual business, how the firm defines its services may be important. For example, in Athol Daily News v. Board of Review of the Division of Employment & Training, the court found:
In light of the fact that the News itself defines its business as “publishing and distributing” a daily newspaper, we agree that the carriers’ services are performed in “the usual course of [the News’s] business.” See Mattatuck Museum-Mattatuck Historical Soc’y v. Administrator, Unemployment Compensation Act, 238 Conn. 273, 280 (1996) (art instructor services performed “on a regular or continuous basis” within art museum); Bigfoot’s, Inc. v. Board of Review of the Indus. Comm’n of Utah, 710 P.2d 180, 181 (Utah 1985) (musicians performed “usual and customary” activity of beer bar); Yurs v. Director of Labor, 94 Ill. App. 2d 96, 104 (1968) (organist played music as “usual part of” funeral home’s business).
Not all courts have agreed with this approach. For example, in Q.D.-A., Inc. v. Indiana Department of Workforce Development, Indiana’s Supreme Court, recognizing that there is no definition of business in its own ABC statute, began its analysis of the B prong by borrowing a definition from other courts:
With no Indiana case clearly defining “course of business,” we adopt the definition applied by two of our sister states under their respective ABC Tests: “if an enterprise undertakes an activity, not as an isolated instance but as a regular or continuous practice, the activity will constitute part of the enterprise’s usual course of business irrespective of its substantiality in relation to the other activities engaged in by the enterprise.” Appeal of Niadni, Inc., 93 A.3d 728, 732 (N.H. 2014) (alterations removed) (quoting Mattatuck Museum v. Unemployment Comp., 679 A.2d 347, 351 (Conn. 1996)). In other words, if a company regularly or continually performs an activity, no matter the scale, it is part of the company’s usual course of business. And if a company regularly or continually performs activities showing it is “engaged in various separate and independent kinds of businesses or occupations,” it may have more than one course of business. Scott v. Rhoads, 114 Ind. App. 150, 150, 51 N.E.2d 89, 91 (1943).
The facts of the case are similar to many cases alleging worker misclassification. Q.D.-A. is a business that connects drivers with customers who need too-large-to-tow vehicles driven to them. Q.D.-A. contracted with a Driver to pair him with customers needing this driving service. The parties entered into a written contract that explicitly called the Driver an independent contractor and allowed him to choose his own hours and the routes he believed were safest and most direct, contract with Q.D.-A.’s competitors, decline any work offered by Q.D.-A., negotiate his pay for each trip, and hire other drivers to complete his deliveries if they were qualified under federal regulations.
Turning to the case at hand, the court noted that the parties agreed that the worker performed drive-away services, but disagreed as to what constituted the company’s “business.” The Department of Workforce Development argued that how a company markets itself should play an important role in defining its business. The court rejected this argument, noting that “marketing plays little, if any, direct role in analyzing the activities Q.D.-A. performs on a regular or continual basis. To be sure, advertising can reflect services a company offers to its customers. But we cannot uncritically rely on that advertising to fully reflect the activities a company regularly or continually performs.” The court further added:
Instead, according to the panel’s “common-sense standpoint,” these customers would call the company to transport the RVs without caring how the company accomplished the task. [Citation omitted.] In other words, the panel supported its conclusion with speculative customer belief and facts not relevant to activities the company regularly or continually performed. By leaving the company’s activities unexamined, [its] reasoning did not answer the statutory question of whether its usual course of business included delivering RVs.
Ultimately what the Indiana Supreme Court did was reject what is far too common in worker classification cases—reaching a conclusion based on assumptions and “common sense” rather than a reasoned decision based on application of the law to the actual facts. But this raises the issue of whether the definition of the term “business” is clear, articulable and knowable, or, as is so often the case, based upon what the trier of fact thinks a business does, such that any “rule” can be objectively applied to facts.
In Curry v. Equilon Enterprises, LLC, a published opinion rendered only a few weeks after the California Supreme Court’s Dynamex opinion, the appellate court addressed the ABC test in the context of a joint employer case. The matter involved whether an employee of a company that leased service stations from Shell was also an employee of Shell under a joint employment theory. Applying the Dynamex’s court analysis of the ABC test, the Curry court stated:
The “B” factor requires an examination of whether “the worker performs work that is outside the usual course of the hiring entity’s business.” (See Dynamex, supra, 2018 Cal. LEXIS 3162, *90.) For example, if a bakery hires cake decorators to work on a regular basis, then those cake decorators are likely working within the bakery’s “usual business operation,” and thus would be employees. Whereas an electrician hired to work at a bakery would likely be viewed as not working within the bakery’s usual course of business and therefore would not be viewed as an employee. (Id. at pp. *92–93.)
We concluded ante that Curry was engaged in the distinct occupation of an ARS station manager. We also concluded ante that Curry’s “management of two gas stations was part of ARS’s regular business because ARS’s business involved operating gas stations.” We explained that “Shell was not in the business of operating fueling stations—it was in the business of owning real estate and fuel.” Thus, there is not a triable issue of fact as to the “B” factor because managing a fuel station was not the type of business in which Shell was engaged.50
However, in Vazquez v. Jan-Pro Franchising International, the Ninth Circuit, which held that Dynamex applied retroactively, states that “the ABC test is conjunctive, so a finding of any prong against the hiring entity directs a finding of an employer-employee relationship.51 Prong B may be the most susceptible to summary judgment on the record already developed.” The opinion then notes, “courts have framed the Prong B inquiry in several ways. They have considered whether the work of the employee is necessary to or merely incidental to that of the hiring entity, whether the work of the employee is continuously performed for the hiring entity, and what business the hiring entity proclaims to be in.” The Vazquez court curiously also cites the Mattatuck Museum case.
In discussing these approaches, Vazquez focuses in part on economics. Citing an Illinois case,52 it found that carpet measuring was necessary to a carpet retailer, and so the workers were in the same business as the carpet retailer, but a person who performed “highly specialized restoration work” was not a “key component” to a general contractor, and thus in a different business. Further, it distinguished cab leases, where the lessor’s revenue did not vary based on the services of the drivers, from the situation where the drivers paid a percentage of their earnings to a limousine company. Vazquez, citing the Athol Daily News case, also looked at how the business holds itself out to the public.
Turning back to the Dynamex opinion, what is the “usual course of business” of a retail store? The court does not say, and it is not defined anywhere in the opinion. If we do not know what that business is, how can anyone know whether a service is or is not in the usual course of such business? The answer, presumably, is we just assume we know or get to guess based on the description “retail store” that its business is “selling” some kind of tangible goods. The court’s analysis now suggests that the “B” prong is based on assuming someone knows what a business does.
What if the retail store is part of a large chain that has its own maintenance staff that includes plumbers and electricians? Are maintenance and repairs then part of the usual business of the retail store? If so, if it still hires an outside plumber or electrician, does that create an employment relationship under the “B” prong? What if that outside plumber has his own truck, tools, advertising, and other clients? Is he then in business for himself as a “traditional independent contractor” under the “C” prong, particularly if the retail store does not “control” him under the “A” prong? What if the electrician is a retired electrician that happens to be a friend of the store manager, and offers to fix whatever electrical issue exists for a small fee? Is he an employee because the “C” prong is not met or because the “B” prong is not met, or both? These kind of practical questions have no answer in the court’s opinion.
In summary, what is telling from the court’s bare and incomplete examples is not what it says, but everything the court chooses to omit that could make the question difficult to answer. By failing to address any complex, modern, real-world examples, the court leaves unanswered several critical questions and provides little meaningful direction for courts, agencies, businesses or workers.53
3. The "C" prong
The “C” prong is also potentially problematic for many businesses. Although arguably the “C” prong was previously a factor to consider under the Borello test, the new test appears to require that the individual (1) was already in business for him- or herself and (2) works in a customarily independent profession. This latter requirement is less clear than the former, and whether new professions—work that does not yet exist—could ever become “customarily” independent is open for debate.
In Curry (the California decision that addressed the impact of Dynamex in a joint employer context), the court explained the “C” prong as follows:
The “C” factor requires evidence “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.” (See Dynamex, supra, 2018 Cal. LEXIS 3162, *88.) This factor can be proven with evidence that the worker has “take[n] 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.” (Id. at *97.)
As explained ante, in the policy section of this discussion, the “ABC” test is directed toward the issue of allegedly misclassified independent contractors. Trying to apply the “C” factor in a joint employment case will lead to an analysis that is a blend of the “A” and “B” factors, e.g., whether Curry was engaged in an occupation independent from the alleged secondary employer.54