In Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, the California Supreme Court joined a handful of other states, including Massachusetts, in adopting the “ABC test” to determine whether a worker is an employee or an independent contractor. The reach of Dynamex is currently cabined to state wage orders, which regulate certain terms of employment, such as state minimum wage, overtime, and meal and rest breaks. The ABC test is a stark departure from the common-law test focused primarily on the degree of control a hiring entity exercised, or had the right to exercise, over an individual — which is the test that still applies, for now, to claims arising under the California Labor Code and other statutes. Recall our earlier post on the Grubhub decision, in which we outlined various factors companies might consider under the common-law test when classifying workers as independent contractors or employees.
Under the ABC test articulated in Dynamex, a worker is presumed to be an employee unless the hiring entity establishes each of these three factors: The worker (A) is free from the hiring entity’s control and direction over performance of the work, both under the contract and in fact; (B) performs work that is outside the usual course of the hiring entity’s business; and (C) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. All of the ABC factors must be established, or the presumption that the worker is an employee stands.
As noted in our post on the Grubhub decision, employee classification is an ever-evolving area of law. Although it is unclear what specific effects Dynamex will have on companies operating in California, it will likely affect different sectors of the state’s economy differently. Transportation and delivery companies (like Dynamex) and the gig economy may be some of the hardest hit and left feeling like persona non grata these days. Lawsuits have already been filed against the ride-sharing and food delivery service apps Lyft and Postmates, respectively, that rely on the ABC test in the wake of Dynamex.
The decision also raises several questions. For starters, with respect to part B of the test, how will a company’s “usual course of business” be defined? Will industry standards have a role to play in this analysis? And how should companies manage compliance in a system that applies different worker classification tests depending on the statute, regulation, or order at issue?
While we wait for answers to those questions to be developed through the courts and agencies, companies can take the initiative to (1) review their independent contractor relationships in light of the common-law right-to-control factors, (2) assess both the scope of their “usual course[s] of business” and to what degree contractor work could be considered to be part of it, and (3) ensure that diligence into potential contractors provides sufficient information to evaluate if potential contractors have their own businesses through which they offer the services that would be provided to the company.