The California Supreme Court recently issued its long-awaited decision in Dynamex Operations West v. Superior Court, establishing a new standard to determine whether a worker is properly classified as an employee or an independent contractor. The court held that all workers are presumed to be employees, and that companies must prove that independent contractors are properly classified under the newly-adopted "ABC" standard. The Dynamex decision will have lasting effects on any companies utilizing independent contractors in California.
Companies in many industries – including construction, trucking, logistics, restaurants, and food service – utilize independent contractors, and many businesses classify their sales staff as independent contractors. This practice has only increased in today's economy. Plaintiffs' attorneys in California have been targeting companies, claiming that their independent contractors should really be classified as "employees" who are entitled to minimum wage, overtime, meal and rest breaks, paid sick time, expense reimbursement, and other forms of compensation.
Prior to the Dynamex decision, California courts looked to a multi-factor standard set forth in Borello & Sons, Inc. v. Dep’t of Indus. Relations. The Borello standard considers factors such as the worker's investment in tools used, the method of payment, the degree of permanence of the relationship, and the parties’ intention regarding the relationship.
The California Supreme Court held in Dynamex, however, that the Borello standard does not apply to employment relationships under California's Wage Orders. Instead, courts – and thus employers – should look to the "ABC" test, which requires the employer to prove all of the following:
A. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract and in fact
B. The worker performs work that is outside the usual course of the hiring entity’s business
C. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed
Importantly, under the "ABC" test, there is a presumption that a worker hired by an entity is an employee, and the burden is on the company to establish that the worker is, in fact, an independent contractor.
One open question is to what extent, if any, the Dynamex decision and the "ABC" test will apply to claims brought under the California Labor Code – which were not at issue in Dynamex – rather than claims, like in Dynamex, which are brought under California's Wage Orders. However, this might be a distinction without a difference. Whether or not the "ABC" test in Dynamex is ultimately extended to Labor Code claims, California companies who misclassify employees under the "ABC" test will still be exposed to claims under the Wage Orders, including the possibility of significant damages awards.
If your company utilizes independent contractors in California, we suggest reviewing the relationship in light of the "ABC" test. Prong "B" of the "ABC" test – whether the work performed is outside the "usual course" of the company's business – merits particularly close analysis. The Dynamex decision provided the following hypotheticals which can serve as guideposts in the necessarily fact-dependent analysis:
- A retail store that hires a plumber or electrician to make repairs
- A clothing manufacturer that hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company to be later sold by the company
- A bakery that hires cake decorators to work on a regular basis on its custom-designed cakes
Regarding the first example, the court stated that "the services of a plumber or electrician are not part of the store's usual course of business." However, the court stated that the work performed in the second and third examples "are part of the hiring entity's usual business operation."
Companies utilizing independent contractors in California should also be aware that the Dynamex decision does not necessarily mandate that all independent contractors be converted to hourly or non-exempt employees. Workers previously classified as independent contractors could qualify as exempt workers under California's various exemptions, including the outside sales, inside sales, computer professional, executive, administrative, and/or professional employee exemptions.