The California Supreme Court published a unanimous decision presenting a new legal standard for determining whether workers should be classified as employees or independent contractors. The Court moved away from the previous, multifactor worker classification analysis and joined other jurisdictions that have adopted the “simpler, more structured” “ABC” test as the legal standard for worker classifications. In addition, the Court placed the affirmative burden on employers to prove that they properly classified their workers.

On April 30, 2018, the California Supreme Court published its unanimous decision in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County¸ No. S222732 (Cal. April 30, 2018), which presented a new legal standard for determining whether workers should be classified as employees or independent contractors. In its opinion, the Court moved away from the previous, multifactor worker classification analysis and joined other jurisdictions that have adopted the “simpler, more structured” “ABC” test as the legal standard for worker classifications. In addition, the Court placed the affirmative burden on employers to prove that they properly classified their workers.

In Dynamex, the California Supreme Court upheld the certification of a class of drivers who claimed they were misclassified as independent contractors by Dynamex, a delivery company. Specifically, the Court disagreed with Dynamex’s argument 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 Court further disagreed with Dynamex’s argument that the three alternative definitions of “employ” in the California Industrial Wage Commission’s (IWC) Wage Orders, as set out in Martinez v. Combs, 49 Cal.4th 35 (2010), are applicable only in determining whether an entity is a joint employer. In doing so, the Court concluded that courts may rely upon the “suffer or permit to work” definition of “employ,” one of the three alternative Martinez definitions, in evaluating whether a worker is an employee or an independent contractor for purposes of the various obligations imposed by the Wage Orders.

Relying on the “intended expansive reach of the suffer or permit to work standard” and the remedial purpose of the IWC Wage Orders, the Court concluded “that the ‘suffer or permit to work’ definition of ‘employ’ contained in the wage order may be relied upon in evaluating whether a worker is an employee or, instead, an independent contractor for purposes of the obligations imposed by the wage order.” Moreover, 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.”

The ABC Test

Concerned with what it perceived are the “significant disadvantages” of multifactor tests, such as a lack of clarity and an increased opportunity for manipulation, the California Supreme Court professed adoption of a “simpler, more structured test” in the form of the ABC test. Under the ABC test, in order to classify a worker as an independent contractor, a 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 independently established trade, occupation, or business of the same nature as the work performed.

Additionally, 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. Given that it may sometimes be easier for a court to determine whether part B or C of the test has been satisfied, the California Supreme Court noted that “a court is free to consider the separate parts of the ABC standard in whatever order it chooses.”

Part A: Freedom From Control And Direction In Performance Of The Work

The first part of the ABC test requires a hiring entity to establish “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.” Specifically, this element of the test focuses on the hiring entity’s level of “control” over the performance of the work it engaged the worker to perform. As such, this part of the ABC test is most akin to the common law test, which has, until now, been widely used in determining worker classification. 

The Court confirmed the understanding that “depending on the nature of the work and overall arrangement between the parties, a business need not control the precise manner or details of the work in order to be found to have maintained the necessary control that an employer ordinarily possesses over its employees, but does not possess over a genuine independent contractor.” The Court cited the following examples:

Knitters and sewers of a children’s wear company worked at home on their own machines, at their own pace, and on days and times of their own choosing but were provided all the patterns and yarn by the company, which designed all the clothing. Company did not establish Part A because the degree of control and direction over production of the company’s product was the same regardless of the schedule or location of the worker. Hiring entity failed to establish Part A because it required truck driver to keep truck clean, to obtain company’s permission before transporting passengers, to go to the company’s dispatch center to obtain assignments not scheduled in advance, and could terminate driver’s services for tardiness, failure to contact dispatch, or any violation of the company’s written policy. Construction company satisfied P art A where the worker set his own schedule, worked without supervision, purchased all materials he used on his own business credit card, and had declined an offer of employment proffered by the company because he wanted control over his own activities. 

Part B: Work That Is Outside The Usual Course Of Business

The second part of the ABC test requires a hiring entity to establish “that the worker performs work that is outside the usual course of the hiring entity’s business.” This element seems to most address the Court’s concern with preventing companies from engaging in “cost saving worker classifications” that fail to provide the Wage Orders’ protections to similarly situated workers. As the Court explained, “[w]orkers whose roles are most clearly comparable to those of employees include individuals whose services are provided within the usual course of the business of the entity for which the work is performed and thus who would ordinarily be viewed by others as working in the hiring entity’s business and not as working, instead, in the worker’s own independent business.”

As guidance, the California Supreme Court presented the following examples:

Services of a plumber or electrician hired by a retail store to perform bathroom repairs or electrical installations on the premises are not part of the store’s usual course of business. Work-at-home seamstress hired by a clothing manufacturing company to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company is part of the company’s usual course of business. Cake decorators hired by a bakery to work on a regular basis on its custom-designed cakes is part of the hiring entity’s usual course of business.

Part C: Customarily Engaged In An Independently Established Business

The third part of the ABC test requires a hiring entity to establish “that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.” With this element, the Court highlights the distinction between workers unilaterally designated as independent contractors by the hiring entity and those who independently made the decision to go into business for themselves and, thus, have generally taken steps to establish and promote their business. According to the Court, “[w]hen a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor by the unilateral action of a hiring entity, there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification.”

The California Supreme Court also explains that this part of the ABC test will not be established by merely permitting a worker to engage in similar activity for other companies. Specifically, “[t]he fact that a company has not prohibited or prevented a worker from engaging in such a business is not sufficient to establish that the worker has independently made the decision to go into business for himself or herself.” The Court cited the following examples:

Siding installers were not engaged in an independently established business because, although they provided their own tools, no evidence was presented that they had business cards, business licenses, business phones or business locations, or had ever received income from anyone other than the hiring entity. A pickup and delivery service failed to prove that a bicycle courier was engaged in an independently established business because there was no evidence that the courier held himself out as an independent businessman performing courier services or that he had his own clientele, used his own business cards or invoices, advertised his services, or maintained a separate place of business or telephone listing. Lack of evidence that auto repair appraisers had actually worked for other businesses is insufficient to establish that the appraisers were not customarily engaged in an independently established business where the appraisers had obtained their own independent licensees, possessed home offices, provided their own equipment, printed their own business cards and sought work from other companies.

Moving Forward

Although the California Supreme Court provides clarity in applying the “suffer or permit” standard to worker classification, there remain open questions and considerations that have yet to be addressed. In particular, the Court explicitly left intact the Borello test in the context of worker classifications that fall outside the scope of the Wage Orders, thus opening the door to potentially navigating separate tests for an individual worker, and resulting in the possibility that a worker may be considered an independent contractor for one purpose but not another. Although presented with the possibility of “inconsistent determinations for disparate claims under different labor statutes brought by the same individual,” the Court seemed unpersuaded by Dynamex’s argument regarding potential confusion and inconsistency. 

The Court also does not address what role, if any, this new interpretation of the “suffer or permit” standard has in the joint employment context. Given that the three alternative Martinez definitions for “employ” arose, and have been applied, in the context of joint employment analysis, it is unclear whether the ABC test will have any effect on the application of the “suffer or permit” standard in this context. 

Given that the misclassification of workers can result in significant legal exposure for employers, the Dynamex decision will undoubtedly raise concerns among industries throughout California. In particular, worker misclassification can result in significant damages, including but not limited to back pay, interest, penalties, unemployment insurance taxes and state employment taxes, as well as impact company benefit plans and workers’ compensation insurance. Therefore, it is important that companies take the opportunity to work with experienced California counsel to reassess the classification determinations of their workforce to ensure compliance with the California law.