independent contractor

A new decision, Garcia v. Border Transportation Group, LLC, analyzes the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court, which changed the test for independent contractors under California law.  In Border Transportation, Plaintiff Jesus Cuitalhuac Garcia filed the case against Border Transportation Group, LLC and its owners for wage and hour violations stemming from his classification as an independent contractor.  The trial court agreed with the company’s classification as an independent contractor in granting Border Transportation’s motion for summary judgment.  Plaintiff appealed the ruling granting the motion for summary judgment, and while the appeal was pending, the California Supreme Court issued Dynamex Operations West, Inc. v. Superior Court.

The appellate court, in Garcia v. Border Transportation Group, LLC, held that summary adjudication should not have been granted as to the wage order claims, but was proper as to the non-wage-order claims.  Here are five key take-aways from the Border Transportation decision:

1. Borello factors for distinguishing “employees” from “independent contractors”

Border Transportation filed a motion for summary judgment before the trial court arguing that it did not exercise control over Garcia, who was a taxi driver for the company.  The company also argued that Garcia’s supervisor’s role was limited to collecting payments from plaintiff and other drivers, and never reprimand plaintiff during his employment.

The court set out that the California Supreme Court in Borello “defined a general approach to determine whether a worker is an employee or an independent contractor.”  In Borello, the court explained that the “principal test of an employment relationship is whether the person to whom the service is rendered has the right to control the manner and means of accomplishing the result desired.”  The right to discharge the worker at will, without cause, is strong evidence of an employment relationship.

In addition to the “control” over the workers, Borello also set forth other factors (“secondary indicia”) to review in determining worker’s employment status:

(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.

Borello also makes it clear that the classification used by the parties can be considered, but it is not determinative of how the employee should be classified.

2. “Suffer or permit to work” definition of employment

In Martinez v. Combs, the California Supreme Court reviewed the definitions of “employ” under the IWC Wage Orders and held that there were three alternative definitions of employ.  The broadest definition of employ is to “suffer or permit to work.”  Generally, the court explained that employers who know people are working and not being paid for the work or by not preventing unpaid work from occurring, “clearly suffers or permits that work” and is liable for the wages for these workers.

The court set forth that “the Supreme Court [in Dynamex] explained, the trial court properly applied the ‘suffer or permit to work’ definition of employment in Martinez, instead of the ‘control’ test in Borello, to evaluate class certification for wage order claims.”  However, the Dynamex decision did not address “what standard applies to non-wage-order claims.”

Under the ABC test set forth in Dynamex, a worker is presumed to be an employee, unless the hiring entity establishes each of the following:

(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. (Dynamex, supra, 4 Cal.5th at p. 957.)

3. Wage orders issued by the Industrial Welfare Commission (IWC) set forth requirements for employers that are distinct from the Labor Code.

As the court explained, the IWC developed “constitutionally authorized, quasi-legislative regulations” that “impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees” in various industries.  Employers are required to comply with the requirements set forth in the wage order that applies to their industry (click here for a list of the 17 IWC wage orders).

4.The Dynamex ABC test only applies to wage-order claims, and the Borello test applies to all other claims.

The court in Border Transportation held that “Dynamex applied the ‘suffer or permit to work’ standard contained in the wage order without deciding what standard applied to non-wage-order claims, such as claims for expense reimbursement (such as for fuel or toll road fees) under Labor Code, section 2802.  The court in Border Transportation explained:

[Dynamex] did not reject Borello, which articulated a multifactor test for determining employment status under the Worker’s Compensation Act. Nor did it address the appellate court’s ruling that “insofar as the causes of action in the complaint . . . are not governed by the wage order” and predicated solely on the Labor Code, “the Borello standard is the applicable standard for determining whether a worker is properly considered an employee or an independent contractor.”

The court held that the “suffer or permit to work” and the ABC test was applicable to the wage order claims because the wage orders define “employ” in this language, and the wage orders regulate very basic working conditions and are meant to cover the widest class of workers.

Therefore, the court held that plaintiff’s wage-order claims for unpaid wages, failure to pay minimum wage, failure to provide meal and rest periods, failure to furnish itemized wage statements, and Unfair Competition Law (UCL) are governed by the “suffer or permit to work” standard set forth in Dynamex.  Plaintiff’s remaining claims for overtime (the wage order does not apply to taxicab drivers), wrongful termination and waiting time penalties under Labor Code section 203, are not covered by the wage orders, and therefore are subject to the Borello test.

Therefore, the court found that as to plaintiff’s wage order claims, there is a triable issue of fact as to whether plaintiff was an employee under the ABC test.  The ABC test “presumes a worker hired by an entity is an employee and places the burden on the hirer to establish that the worker is an independent contractor.”

5. Part C of the ABC test under Dynamex requires the company to show an existing independent business operation for independent contractors. 

The court explained that “Dynamex makes clear that the question in part C is not whether [Border Transportation] prohibited or prevented [plaintiff] from engaging in an independently established business.”  Instead, the analysis is if the plaintiff “independently has made the decision to go into business for himself or herself” and “generally takes the usual steps to establish and promote his or her independent business – for example, through incorporation, licensure, advertisements, routine offerings to provide services of the independent business to the public or to a number of potential customers, and the like.”

Defendant relied upon a 2015 Massachusetts Supreme Court case, Sebago v. Boston Cab Dispatch, Inc., to argue that Boston taxi drivers who leased medallions from owners were “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.” In rejecting this analogy to the facts in this case, the court held that “Dynamex makes clear that California follows the version of part C that requires an existing, not potential, showing of independent business operation.”  The court held that based on the facts in this case, plaintiff was dependent on the company for his taxi permit, and therefore did not have the ability to independently operate on his own accord.  Indeed, the court noted that defendant “did not establish that [plaintiff] ‘is customarily engaged in an independently established trade, occupation, or business.”

Regular readers of the blog probably know about my YouTube channel for the Employment Law Report.  This Friday’s Five focuses on recent popular videos I’ve published covering employment law updates, best practices, and an interview with a restaurant consultant.  Hope you enjoy the videos, and please subscribe to the channel to make sure you don’t miss any future updates.

1. 5 Huge Misconceptions About California Employment Law

2. California’s Paid Sick Leave – Quick Update

3.California’s New ABC Test For Independent Contractors

4. My Five Free Resources for California Employers

5. My interview with Salar Sheik from Savory Hospitality

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.