SUPREME COURT LAYS DOWN ABC’S OF EMPLOYEE VS. INDEPENDENT CONTRACTOR STANDARDS
On April 30, 2018, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court, _____ Cal.5th _____ (2018), where it described a seismic shift in the standards used to examine independent contractor relationships, under the Wage Orders. Stating that a “hiring entity” will bear the burden of proof in “misclassification” cases, the Supreme Court announced a judicial crackdown against businesses that misclassify employees as independent contractors in order to derive an unfair competitive advantage over other businesses that comply with the law. As the discussion below shows, Dynamex is a game changer.
1. Fundamental Differences Exist In The Obligations Owed To Employees vs. Independent Contractors
The Court began its 82-page decision by identifying numerous responsibilities that employers have for employees that do not apply to independent contractors. It proceeded to make it clear that the responsibilities cannot be sidestepped by misclassifying employees as independent contractors. It then identified the standard that applies in deciding whether workers should be classified as employees or independent contractors for purposes of the California Wage Orders that impose obligations relating to minimum wages, maximum hours, overtime pay, meal and rest periods and other matters. The Supreme Court announced that, based on the Wage Orders’ “suffer or permit to work” standard, “hiring entities” must satisfy a three-part test, the “ABC test,” to establish that an individual qualifies as an independent contractor. This test applies to claims that derive directly from the obligations imposed by the Wage Orders. It does not necessarily follow that the same test will apply under different statutes, such as the reimbursement rules for business expenses that are obtainable only under Labor Code Section 2802. Employers should therefore recognize that the new test will not govern misclassification questions in every context.
2. Overview Of Case
The case arose when two delivery drivers filed a class action against Dynamex, a nationwide package and document delivery company. They alleged that Dynamex, referred to as a “hiring entity,” had misclassified drivers as independent contractors rather than employees. As a result of the alleged misclassification, the drivers asserted claims under Wage Order 9, which governs the transportation industry, as well as various sections of the Labor Code. They also claimed that Dynamex engaged in unfair and unlawful business practices under California Business and Professions Code Section 17200.
a. The “Suffer Or Permit To Work” Rule
The Supreme Court explained 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 an independent contractor for purposes of the obligations imposed by the Wage Order. It concluded that the suffer or permit to work definition must be interpreted broadly in order to provide the Wage Order’s protections to all workers who would “ordinarily be viewed as working in the hiring business.” Yet, it also cautioned there are limits on the scope of the suffer or permit to work definition, which the Supreme Court described as a “term of art.” For example, it cannot be interpreted literally in a manner that would encompass within the “employee category” the type of workers, like independent plumbers or electricians, who have traditionally been viewed as genuine independent contractors working in their own independent business. The Supreme Court thus injected a new question into the analysis – what is a “genuine” independent contractor?
b. The Role Of The “ABC” Test
Under the suffer-or-permit-to-work framework, the Supreme Court concluded that in determining whether a worker is properly considered an independent contractor to whom the Wage Order does not apply, it is appropriate to look to a standard, commonly referred to as the “ABC” test that is utilized in other jurisdictions. Under this test, a worker is properly considered an independent contractor to whom a Wage Order does not apply only if the hiring entity establishes each of three elements:
(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work (both under the contract for the performance of such work and in fact);
(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 for the hiring entity.
3. The History Of Relevant California Decisions
The Supreme Court embarked upon a 40-page analysis of cases that proffered an historical review of the distinctions between employees and independent contractors under California law. The discussion began with a 1944 United States Supreme Court decision and reviewed later developments through the present. In the course of this historical analysis, the Supreme Court devoted particular attention to three California Supreme Court decisions that had each been heralded as “seminal” in their own right. These three pillars of California’s employee vs. independent contractor jurisprudence constructed between 1989 and 2014 included the decisions in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989) (“Borello”), Martinez v. Combs, 49 Cal.4th 35 (2010) (“Martinez”), and Ayala v. Antelope Valley Newspapers, Inc., 59 Cal.4th 522 (2014) (“Ayala”). Martinez, for example, identified the following three alternative definitions “to employ.” It means (a) to exercise control over the wages, hours, or working conditions, or (b) to suffer or permit to work, or (c) to engage.
a. The Burden Of Proof
After analyzing these cases, the Supreme Court firmly placed the burden of proof on the “hiring entity” in the wage and hour context, noting concerns inherent in relying upon a multifactor, “all the circumstances” standard for distinguishing between employees and independent contractors. Instead, based on the history and purpose of the “suffer or permit to work standard” in California’s Wage Orders, the Supreme Court decided to (1) place the burden on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the Wage Order’s coverage, and (2) require the hiring entity, in order to meet this burden, to establish each of the three factors embodied in the ABC test – “namely (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.”
b. Analysis Of The Three Elements
(1) Part A – Focus on Control
After listing the three factors embodied in the ABC test, the Supreme Court elaborated on each of the factors. For example, under Part A, the decision explained that a worker who is subject, either as a matter of contractual right or in actual practice, to the type and degree of control a business typically exercises over employees would be considered an employee under the common law test as well as the “suffer or permit to work” standard. Further, as noted in Borello, 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 hiring entity must establish that the worker is free of such control to satisfy Part A of the test.
(2) Part B – Work Performed Outside Of The Usual Course Of Business
Under Part B, a separate question is examined independent of the question of control in Part A. This test inquires whether the worker performs work that is outside the usual course of the hiring entity’s business. Workers 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 rather than working in the worker’s own independent business. For example, when a retail store hires an outside plumber or electrician to repair a leak or install an electrical line, the services are not part of the store’s usual course of business. Thus, the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services as an employee.
The decision explained that a focus on the nature of the worker’s role within a hiring entity’s usual business operation aligns with the additional purpose of the Wage Orders to protect companies that in good faith comply with a Wage Order’s obligations against those competitors in the same industry or line of business that resort to cost saving worker classifications that fail to provide the required minimum protections to similarly situated workers. Accordingly, a hiring entity must establish that the worker performs work that is outside the usual course of its business in order to satisfy Part B of the ABC test.
(3) Part C – Engaged In An Independent Trade, Occupation, Or Business
Part C of the test asks whether the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed by the hiring entity. The decision observed that the term “independent contractor,” when applied to an individual worker, ordinarily has been understood to refer to an individual who independently has made the decision to go into business for himself or herself. Such an individual generally takes the usual steps to establish and promote his or her independent business – “for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.
When 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. A company that labels as independent contractors a class of workers who are not engaged in an independently established business in order to enable the company to obtain the economic advantages that flow from avoiding the financial obligations that a Wage Order imposes on employers unquestionably violates the fundamental purposes of the Wage Order. The 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.”
Accordingly, in order to satisfy Part C of the ABC test, the hiring entity must prove that the worker is customarily engaged in an independently established trade, occupation, or business.
4. Summary Of The ABC Standard
The Supreme Court emphasized that the hiring entity must establish the existence of each of the three parts of the ABC standard in order to establish that a worker is an independent contractor. Thus, unless the hiring entity establishes that (A) 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 for the work and in fact, (B) the worker performs work that is outside the usual course of the hiring entity’s business, and (C) the worker is customarily engaged in an independently established trade, occupation, or business, the worker should be considered an employee and the hiring business an employer under the suffer or permit to work standard in the Wage Orders. The hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is covered by the Wage Order as an employee.
Notably, the Supreme Court cautioned that the interpretation of the suffer or permit to work standard should not yield inappropriate results. For example, it recognized that the Wage Orders are not intended to apply to the type of “traditional independent contractor – like an independent plumber or electrician –” who has never been reasonably viewed as an employee of a hiring business. Consequently, the Wage Orders should not be interpreted to apply to such persons.
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