The California Supreme Court handed down its highly anticipated decision in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County, No. S222732 (Cal. April 30, 2018), adopting a new legal standard to be used in determining whether workers should be classified as employees or as independent contractors. Specifically, in the unanimous Dynamex decision, the Court professed adoption of a “simpler, more structured test” for determining whether a company “employs” or is an “employer” under the California Industrial Welfare Commission’s (IWC) Wage Orders. The Court not only adopted a new legal standard for worker classifications, but also set out an affirmative burden on a company to prove that workers are properly classified.

At issue in Dynamex was the scope of Martinez v. Combs, 49 Cal.4th 35 (2010), which held that the IWC Wage Orders embody three alternative definitions of “employ”: “(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.” In particular, Dynamex challenged the trial court’s certification of a class of delivery drivers because of the trial court’s reliance upon the three alternative definitions of “employ.” Dynamex argued that the multifactor common law test from S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations, 48 Cal.3d 341 (1989), is the only proper test.

The California Supreme Court disagreed with Dynamex and held that the “suffer or permit to work” definition of “employ” was properly applied to the question of whether a worker is an employee or independent contractor. The Court limited its discussion to the analysis of the scope and meaning of the “suffer or permit to work” standard in the IWC Wage Orders. It interpreted the Borello decision as “calling for resolution of the employee or independent contractor question by focusing on the intended scope and purposes of the particular statutory provision or provisions at issue.” As such, the California Supreme Court relied on the “intended expansive reach of the suffer or permit to work standard” and the remedial purpose of the IWC Wage Orders in concluding that “the suffer or permit to work standard must be interpreted and applied broadly.” Notably, based on the scope of the appeal, the Court left intact the Borello test in the context of worker classifications that fall outside the scope of the IWC Wage Orders.

In determining the proper “suffer or permit to work” standard, the California Supreme Court highlighted what it perceived are the “significant disadvantages” of multifactor tests, such as the economic reality test applied in federal courts or the Borello test. The Court noted disadvantages such as a lack of clarity and an increased opportunity for manipulation. Accordingly, the Court interpreted the “suffer or permit to work” standard as: (1) placing the burden on the hiring entity to establish whether the worker is an independent contractor; and (2) requiring the hiring entity, in order to meet said burden, “to establish each of the three factors embodied in the ABC test.” Specifically, under the ABC test, the hiring entity must establish:

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

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 independent established trade, occupation, or business of the same nature as the work performed.

The Court further reiterated that the failure to satisfy any one of the elements of the ABC test is sufficient to establish that the worker should be classified as an employee.

After pronouncing the adoption of the ABC test, the California Supreme Court then applied the standard in upholding the certification of the class of drivers in the wage-and-hour class action against Dynamex, a delivery company. The Court concluded that “under a proper understanding of the suffer or permit to work standard there is, as a matter of law, a sufficient commonality of interest within the certified class to permit the question whether such drivers are employees or independent contractors for purposes of the wage order to be litigated on a class basis.”

The California Supreme Court’s decision to eschew the traditional multifactor case-by-case worker classification analysis in favor of this “simpler, more structured test” will undoubtedly raise concerns among many industries, including from companies operating in the gig economy space with large independent contractor workforces. Therefore, companies should take this opportunity to reassess the classification determinations of their workforce. Given that the California Supreme Court presents several examples of how to interpret and apply this new test, companies should confirm that their worker classifications will pass muster under the ABC test.