​The California Supreme Court issued a landmark decision in Dynamex Operations West v. Superior Court of Los Angeles, imposing a simplified but more burdensome test that businesses must satisfy to justify contractor status, and thereby avoid compliance with minimum wage, overtime, work hours and meal/rest laws. The unanimous April 30 decision is essentially a mandate for businesses to re-examine their contractor classifications, especially where the business is modeled on, and operated predominantly by, a contractor workforce.

Background

The lawsuit involves claims by a former driver at Dynamex, a national package and document delivery service, that the company misclassified him and all other drivers as independent contractors in violation of California Industrial Welfare Commission Wage Order No. 9, which governs the transportation industry and, like wage orders governing tech and other industries, imposes minimum wage, maximum hours, overtime and meal and rest period obligations on employers.

The new test arose in the context of the former driver’s efforts to certify a class of all current and former drivers who performed services at Dynamex. The trial court certified a broad class of drivers based in part on its determination that commonality existed among the drivers. The court reached this determination by applying a broad, alternative set of definitions of what it means to “employ” a worker, including “to suffer or permit to work.” Dynamex argued that the court should have applied a multi-factor common law test, set out in S.G. Borello & Sons v. Department of Industrial Relations, which includes an assessment of the workers’ skills, the duration of services, whether the work is part of the regular business, the parties’ intentions as to the nature of the relationship and other factors.

On appeal, the California Supreme Court held that the “suffer or permit to work” definition, and not the multi-factor Borello test, is the appropriate standard to assess who should be protected by the wage orders, but that the definition should not be read literally. As such, the court adopted a new standard—the ABC Test—for determining when, under the wage orders, a worker may lawfully be considered an independent contractor and not an employee. Under the ABC test, a worker is properly classified as an independent contractor only if the hiring entity establishes all of the following:

  • That the worker is free from the control and direction of the hirer with the performance of the work, both pursuant to the contract, and in fact;
  • That the worker performs the work that is outside the usual course of the hiring entity’s business; and
  • That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Notably, the ABC test applies only to alleged misclassification under California’s wage orders. It is therefore possible that a worker could be deemed an employee under an applicable wage order (and thus able to pursue claims for minimum wage and overtime violations and the like), and a contractor under other laws (governing, for example, business expense reimbursement, payroll taxes, unemployment benefits and compensation claims that arise outside the wage orders). Further, it is unclear how California’s courts and its Department of Industrial Relations will apply the new test, and specifically, the critical question posed by Part B: When is a worker performing work that is outside, versus within, the entity’s business? Many businesses in the so-called gig economy are uniquely at risk with respect to this inquiry.

Given the significance of this decision, companies should carefully re-examine their contractor classifications with the assistance of legal counsel, and with a laser-like focus on the three components of the test.