This month, the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court (2018 WL 1999120) (“Dynamex”) adopted a new standard to determine whether a worker is an employee versus an independent contractor under California wage orders and regulations. The new standard makes it easier for workers to prove entitlement to benefits of employment.

Dynamex’s biggest impact will be in the so-called “gig economy,” where companies such as Uber and Lyft have treated workers as independent contractors but now will have a tougher time justifying independent contractor status. Likewise, to avoid potentially costly wage and hour claims, construction companies will need to pay close attention to the new standard.

The Dynamex Court adopted a three-part “ABC Standard” from other jurisdictions. Under the ABC Standard, a hiring party has the burden of showing: A) the worker is free, both contractually and in practice, from control and direction on how to perform a service, (B) the worker’s service is outside the hiring party’s usual services or workplace, and (C) the worker has an independently-established trade, occupation, or business of the same nature as the work performed.

In Dynamex, a group of California delivery drivers sued their company, claiming that they were misclassified as independent contractors. The drivers claimed that Dynamex’s alleged misclassification of its drivers as independent contractors 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, as well as various sections of the Labor Code. They also claimed that by misclassifying them as independent contractors and underpaying them, Dynamex had engaged in unfair and unlawful business practices under Business and Professions Code section 17200. The drivers’ lawsuit sought damages for underpaid wages and overtime, failure to provide employment benefits, and failure to provide statutory rest and meal breaks. The drivers’ claims sought payments in the millions of dollars.

The newly-adopted ABC Standard abandons a multi-factor analysis for determining whether a worker should be classified as an independent contractor or an employee. The multi-factor test was first used in S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 342 (“Borello”). Under Borello, the primary consideration was a company’s right to control the manner and means by which the worker performs the work. Borello also allowed consideration of secondary factors, including the degree of skill required to perform the work, the method of payment, and the nature of the company’s usual business. The multi-factor standard in Borello provided employers some leeway to establish an independent contractor relationship, but the Dynamex standard limits this leeway and presents a bigger hurdle for hiring companies.

Relevant to friends of Smith Currie, construction companies must carefully evaluate contracts and subcontractor relationships in light of the ABC Standard. For instance, “captured” subcontractors who work for only one prime contractor may argue that they are employees under the ABC Standard because, as a practical matter, the prime contractor may control how the subcontractors deliver their services, and the subcontractors’ businesses really are not independent from that of the contractor.

Violators will face substantial exposure to workers’ claims for wage and hour violations and competitors’ potential claims for unfair competition and/or unlawful business practices under the Business and Professions Code. To reduce this risk, prime contractors will need to implement and enforce policies designed to avoid imposing control over and overriding the independence of subcontractors.