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New “ABC” Test for Independent Contractors Changes the Landscape for Workers in California

by Sharon Ongerth Rossi and Gayle M. Athanacio

New “ABC” Test for Independent Contractors Changes the Landscape for Workers in California

For nearly thirty years, courts in California have applied a totality-of-the-factors analysis when determining whether workers were employees or independent contractors, particularly when considering whether California’s detailed wage and hour protections should apply. But the economy has dramatically changed since 1989.  The “gig economy” has reshaped the labor market, and it is estimated that by 2020, so-called freelancers will probably make up more than half of the U.S. workforce. Many have raised concerns that, although freelancers enjoy greater freedom in their work lives, they are on the short of end the stick—losing out on numerous protections– while businesses reap the benefit of having a ready, willing, and able workforce without the burden of paying overtime, Workers’ Compensation insurance, or employment taxes associated with an employee workforce.

In late April, the California Supreme Court heeded some of those concerns and issued a landmark opinion in Dynamex Operations West Inc. v. The Superior Court of Los Angeles County.  In this decision, the California Supreme Court extended a myriad of wage and hour protections to workers when it unveiled a new independent contractor test which provides that unless the business can prove, among other things, that workers are performing work that is outside the scope of the hiring entities’ usual course of business, the worker will be deemed an employee.

While the Dynamex opinion leaves many questions unanswered, its clear that the opinion will have far-reaching consequences for California businesses that rely on contractors as part of their regular workforce.

 

Facts

Dynamex is a nationwide package delivery company, working with Amazon, Home Depot and Office Depot to deliver goods to your doorstep.

Before 2004, Dynamex classified all its delivery drivers as employees. But as business picked up, it reclassified them as independent contractors. Almost immediately thereafter, a worker filed a class action lawsuit alleging that he and other similarly situated drivers were misclassified as independent contractors and were entitled to recovery for unpaid overtime, unpaid business expenses, and Dynamex’s failure to provide properly itemized wage statements. That action followed an extremely convoluted path to the California Supreme Court, which finally issued a ruling in April 2018.

 

Decision

Prior to the Dynamex ruling, courts addressing whether workers were properly classified as independent contractors in the context of California’s wage and hour laws embraced the test articulated in 1989 by the California Supreme Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations. The Borello case, which addressed whether certain workers were employees or independent contractors for purposes of Workers’ Compensation statutes, embraced a rather subjective employee/independent contractor analysis. Borello required courts to weigh all the facts, considering the purpose of the statute at issue, to determine employee versus independent contractor status. As a result, the question of who was an independent contractor or employee under Borello was highly fact specific and varied from case to case.

In Dynamex, the Court streamlined the analysis by replacing the multi-factor based assessment with a three-prong classification test. As result, individual workers in California will be considered employees subject to the provisions of California Wage Orders[1] (which regulate wages, hours, and certain working conditions), unless the hiring entity establishes:

  1. The hiring party has no control over hours worked and other conditions of employment;
  2. The worker’s job is outside the employer’s “usual course” of business, and
  3. The worker has an outside job “in an independently established trade, occupation, or business of the same nature.”

Under this test (which the Court referred to as the “ABC” test), a plumber who comes to fix the sink at an IT consulting firm’s office is an independent contractor.  The IT consulting firm (hiring party) has no ostensible legal control over the plumber’s work hours or other conditions of employment (“A”). Furthermore, fixing the sink is clearly outside of the medical clinic’s usual business (“B”). Finally, the plumber almost certainly has other clients for whom s/he provides plumbing services, thus, the plumber is independent engaged in the plumbing trade (“C”).

However, any other worker with the firm that performs work directly related to the provision of IT consultation is likely be found to be an employee subject to the wage orders, because the provision of IT services is within the usual course of the consulting firm’s business. This is true even though there is a well-established, industry-wide custom of IT consultants working as independent contractors.

Similarly, a graphic designer who has the ability to work for multiple companies, the freedom to decline assignments, and who performs work out of her home during hours of her own choosing, could also be found to be an employee of the design company that hired her, because the graphic designer is performing work that is not outside the graphic design company’s usual business.

Answering anticipated concerns about workers preferring the freedom and flexibility that independent contractor working arrangements usually bring, the Court responded:

If a business concludes that it improves the morale and/or productivity of a category of workers to afford them freedom to set their own hours or to accept or decline a particular assignment, the business may do so while still treating the workers as employees for purposes of the wage order.

The Court also made clear that its decision was, in large part, an exercise of judicial activism to protect workers and prevent unfair competition:

Treating all workers whose services are provided within the usual course of the hiring entity’s business as employees is important to ensure that those workers who need and want the fundamental protections afforded by the wage order do not lose those protections. If the wage order’s obligations could be avoided for workers who provide services in a role comparable to employees but who are willing to forgo the wage order’s protections, other workers who provide similar services and are intended to be protected under the suffer or permit to work standard would frequently find themselves displaced by those willing to decline such coverage. . . .

As the Court in Dynamex further explained, having a test that focuses, in part, on the workers’ role within a hiring entity “protect[s] 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.”

Finally, it’s important to note that while the Dynamex court affirmed the prior class certification order (certifying a class essentially consisting of individual drivers who directly contracted with Dynamex), it did not address whether the trial court’s decision to exclude certain drivers from the class—including who provided services to Dynamex as an employee or subcontractor of another person or entity—was proper.

 

Implications

So what protections will workers receive as a result of Dynamex? As previously noted, the new ABC test applies only in the context of California’s Wage Orders which impose obligations related to minimum and overtime wages, maximum hours and working conditions (such as required meal and rest breaks) for California employees.

If a worker is found to be an employee as a result of Dynamex, he or she could be entitled to, among other things:

  • Damages and possible penalties for unpaid wages
  • Premiums for unpaid daily and weekly overtime
  • Penalties for missed meal and rest breaks
  • Penalties for failure to provide adequate wage statements and/or failure to maintain certain records; and
  • Attorneys’ fees

It bears noting that while overtime and meal and rest period provisions of the Wage Orders do not apply to exempt employees, most independent contractors work on an hourly basis and, thus, cannot be considered exempt under any of the so-called white-collar exemptions (for professional, executive, or administrative employees) which require the employee to be paid on a salary basis in an amount equal to at least two times the applicable minimum wage.

Additional penalties for misclassification can be imposed under Labor Code section 226.8 if either a court or the California Labor and Work Development Agency determines that an employer has willfully misclassified an individual as an independent contractor.

Further, employers who have misclassified independent contractors are at risk of Private Attorneys General Act (PAGA) lawsuits, which permit aggrieved employees to pursue representative action on behalf of the State to recover penalties for all aggrieved employees. PAGA lawsuits have been on the rise because plaintiffs can usually pursue these representative actions despite the existence of arbitration agreements with class action waivers and do not need to meet the requirements of class certification to represent other aggrieved employees.  The costs of PAGA lawsuits for employers can be staggering.

Finally, although the Court made it clear that the application of the ABC test was limited to the Wage Orders, it remains to be seen how this will reverberate across various industries and occupations since different laws may apply.  For example, licensed contractors have a specific Labor Code statute that determines independent contractor/employment status – Labor Code §2750.5.  The Dynamex opinion leaves open the question of whether the ABC test supplants this Labor Code provision.  It shouldn’t since there is a legal precedent that more specific statutes should control.  Further, whether the ABC test applies to Labor Code section 2802 (providing an employee’s entitlement to reimbursement for necessary business expenses) is not addressed in the wage orders and is expressly left undecided by the Court in Dynamex.  Because Dynamex addressed the wage order’s definition of employment, it remains to be seen if Dynamex test will be extended to such claims.  Again, there seems to be a persuasive argument it does that the Dynamex test will not be extended to Labor Code section 2802 claims and the like.

Further, it is entirely conceivable that businesses may still be able to properly classify a worker as an independent contractor for tax purposes and other laws (which have different tests for independent contractors), while still treating them as an employee for purposes of California Wage Orders.  However, the fact that an employer treats the worker as an employee for purposes of complying with the Wage Orders suggests, for example, in context of taxability of wages, that the wages paid to that worker should be treated as W2 wages and not 1099 income.

What is clear is that there will be a cascade of new wage and hour lawsuits brought by individuals who have been classified as independent contractors. Indeed, several lawsuits were filed in the days since the Dynamex opinion, including class action and PAGA claims against Lyft, Instacart, and Postmates. Of course, given the broad scope of the Dynamex opinion, these cases will reach far beyond Silicon Valley.

While the independent contractor arrangement is far from being vanquished, California businesses with independent contractors should be aware of the risks and consult with counsel to determine whether they should reclassify those individuals or, in the alternative, how to structure their business so as to have the best chance of surviving a challenge to the individuals’ classification.

At Rogers Joseph O’Donnell, P.C., we have the resources and experience to guide you through this process as well as other difficult Labor & Employment issues. If you would like to learn more, please contact, please contact Sharon Rossi (srossi@rjo.com), Gayle Athanacio (gathanacio@rjo.com) or Dennis Huie (dhuie@rjo.com) at (415) 956-2828.

 

 

Sources:

http://www.courts.ca.gov/opinions/documents/S222732.PDF

https://www.dir.ca.gov/iwc/wageorderindustries.htm

[1] While the Dynamex court made clear that its ruling was based on the definitions of employ, employer, and employee found in Wage Order 9, all of the other wage orders contain the very same definitions. Nonetheless, there are several wage orders which include additional definitions of the term “employee.”

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