The California Supreme Court has clarified the standard for determining whether workers in California should be classified as employees or independent contractors. Dynamex Operations West, Inc. v. Superior Court of Los Angeles, decided April 30, has enormous implications for employers in the “gig economy,” and industries such as trucking, entertainment, technology and health care, all of which traditionally use independent contractors.

In a nutshell, the Dynamex decision will make it much more difficult for businesses to claim that workers are independent contractors rather than employees.

Background

Dynamex, a nationwide same-day courier and delivery service, had reclassified its California drivers as independent contractors in 2004 as a cost saving measure. In January 2005, Plaintiff Charles Lee filed suit on his own behalf and on behalf of similarly situated Dynamex workers, alleging that the company’s misclassification of its drivers led to violations of IWC Wage Order No. 9 (governing the transportation industry) as well as various sections of the Labor Code.

The trial court ultimately certified a class action, relying on the three alternate definitions of “employ” and “employer” set forth in the applicable wage order and as discussed in Martinez v. Combs, an earlier state Supreme Court decision: (1) to exercise control over the hours, wages, or working conditions; (2) to suffer or permit to work; or (3) to engage, thereby creating a common law employment relationship.

Because Martinez involved a joint employer issue, Dynamex argued that its analysis was inapplicable to the classification analysis. Instead, Dynamex proposed that the multifactor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, applied to questions of whether a worker was an employee or independent contractor. The Borello test, also referred to as the traditional “common law” standard, provides that the “right to control” the means and manner in which work is performed is the most important of several factors to be considering when conducting a classification analysis. Secondary factors include ownership of equipment, opportunity for profit and loss, and the understanding of the parties. Because it balances multiple factors, the Borello test allows for more flexibility to evaluate classification based on the individual circumstances of each case.

The Court of Appeal rejected Dynamex’s arguments, concluding that Martinez is not limited to the joint employer context, and rejecting the contention that the Borello test controls in cases involving an obligation arising from an IWC wage order.

The California Supreme Court granted review to clarify the appropriate standard for determining employee or contractor status in the wage order context.

The Supreme Court’s decision

The Supreme Court rejected Dynamex’s arguments limiting the scope of Martinez and applying the Borello test. Instead, the Court held, a worker in California is an employee if any one of the following apply:

  • The entity exercises control over the individual’s hours, wages, or working conditions.
  • The entity “suffers,” or permits, the individual to work.
  • The entity engages the individual, thereby creating a common law employment relationship.

Because “suffer or permit to work” is a term of art, the Court clarified its scope by adopting the so-called “ABC test.” Under the “ABC test,” workers in California are presumed to be employees. To prove that the individual is an independent contractor rather than an employee, the hiring entity must establish all three of the following:

  1. 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.
  2. That the worker performs work that is outside the usual course of the hiring entity’s business.
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Implications and recommendations

Whether a worker is classified as an employee or independent contractor is of particular interest and concern to employers, as an employer bears the responsibility of paying payroll taxes, providing workers’ compensation insurance, and complying with state and federal statutes governing wages, hours, and working conditions. The Dynamex decision has now raised the stakes significantly for misclassification of workers in California.

Entities doing business in California that treat workers as independent contractors should immediately review their relationships under the “ABC test” to determine whether the workers should be reclassified as employees. Business should especially be on the lookout for workers who are retained to work “in the hiring entity’s business” in roles that are comparable to those of employees. These workers are likely to be considered employees and not independent contractors.

Businesses should carefully review practices such as rehiring former employees to perform the same work they did before but as “independent contractors,” or “outsourcing” key functions of the business to individual contractors. The challenges and changes for California employers that will flow from the Dynamex decision will be far-reaching.