The California Supreme Court issued a monumental ruling this week regarding the test used in determining whether a worker can be classified as an independent contractor. In the case, Dynamex Operations West, Inc. v. Superior Court, the plaintiff brought a class action complaint alleging five causes of action arising from Dynamex’s alleged misclassification of employees as independent contractors: two counts of unfair and unlawful business practices in violation of Business and Professions Code section 17200, and three counts of Labor Code violations based on Dynamex’s failure to pay overtime compensation, to properly provide itemized wage statements, and to compensate the drivers for business expenses. Here are five key issues California employers must understand about the ruling:
1. The determination of whether a worker is an independent contractor or an employee is inherently difficult.
The determination of whether an employee is an independent contractor or employee has been a difficult issue that does not provide a bight line in many cases. The California Supreme Court recognized this in Dynamex, stating:
As the United States Supreme Court observed in Board v. Hearst Publications (1944) 322 U.S. 111, 121: “Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent, entrepreneurial dealing. This is true within the limited field of determining vicarious liability in tort. It becomes more so when the field is expanded to include all of the possible applications of the distinction.”
2. The ABC Test: Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
In making the determination of whether a worker is properly considered the type of independent contractor for which the wage order does not apply, the California Supreme Court adopted the “ABC” test. This test is used in other jurisdictions in a variety of contexts to distinguish employees from independent contractors.
To illustrate the first part of the ABC test, the Part A control test, the Court provided the following examples: In Western Ports v. Employment Sec. Dept. the company “failed to establish that truck driver was free from its control within the meaning of part A of the ABC test, where the company required driver to keep truck clean, to obtain the 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 the dispatch unit, or any violation of the company’s written policy.” Alternatively, in Great N. Constr., Inc. v. Dept. of Labor a construction company “established that worker who specialized in historic reconstruction was sufficiently free of the company’s control to satisfy part A of the ABC test, where 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.”
3. Part B: Does the worker perform work that is outside the usual course of the hiring entity’s business?
To illustrate the point, the Court provided the following analysis:
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 and not as working, instead, in the worker’s own independent business.
The Court set forth a few examples: When a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee.
Alternatively, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will then be sold by the company, or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, the workers are part of the hiring entity’s usual business operation it would be reasonable to view these workers as employees.
4. Part C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?
The Court held that the term “independent contractor,” “ordinarily has been understood to refer to an individual who independently has made the decision to go into business for himself or herself.” (See, e.g., Borello, supra, 48 Cal.3d at p. 354 [describing independent contractor as a worker who “has independently chosen the burdens and benefits of self-employment”].) Such an individual generally takes the usual steps to establish and promote his or her independent business….” Evidence of this will be the workers’ own business incorporation, licensure, advertisements, offering to provide services to the general public or other potential customers. Alternatively, a worker is not engaged in an independent established trade usually if the hiring company unilaterally designates the worker as an independent contractor. In addition, “[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 hiring entity’s failure to prove any one of these three parts of the ABC test will be result in a finding that the worker is an employee and not an independent contractor for purposes of the California wage orders.
5. Employers bear the burden of proof in establishing workers are independent contractors.
Employers had the burden prior to the California Supreme Court’s ruling in Dynamex, but the court reinforced that the employer bears the burden of proof when establishing a worker as an independent contractor. Employers must be careful in making the determination that workers are independent contractors, as there are many wage and hour penalties for unpaid wages, unpaid overtime, and missed meal and rest breaks, in addition to the large civil penalties under Labor Code section 226.8, which is a fairly recent law which added penalties from $5,000 up to $25,000 for each violation.