New Test for Independent Contractors
On April 30, 2018, the California Supreme Court in Dynamex Operations West Inc. v. Superior Court (Case No. S222732) modified the test for determining whether a worker is an independent contractor for purposes of California wage orders. The Court expanded the definition of "employee" and rejected its long-standing independent contractor test. Under this new standard, workers are presumed to be employees, meaning that more workers will be subject to minimum wage, overtime pay, and other wage and hour laws.
In a blow to employers, the Court adopted the California's Industrial Welfare Commission's definition of employment, which defines "employ" as “engage, suffer or permit” to work. The Court concluded that the wage order’s "suffer or permit to work" definition must be interpreted broadly to treat as “employees,” and thereby provide the wage order’s protection to, all workers who would ordinarily be viewed as working in the hiring business.
In so holding, the Court moved away from its more flexible analysis in the 1989 decision, S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal. 3d 342 (1989). Under the multi-factor Borello test, the most significant factor in determining the existence of an employment relationship is whether the putative employer has the right to control the manner and means by which the worker performs the work.
The Court instead adopted the so-called “ABC” test, which is utilized in other jurisdictions in a variety of contexts to distinguish employees from independent contractors. 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:
(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; 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 for the hiring entity.
The burden is on the employer to establish that the worker is an independent contractor by establishing each of the three factors. Failure to prove any one of these prerequisites means that the worker is an employee for purposes of the wage order.
According to the Court, this interpretation of the "suffer or permit to work" standard is faithful to its history and to the fundamental purpose of the wage orders and will provide greater clarity and consistency, and less opportunity for manipulation, than a test or standard that requires the consideration and weighing of a significant number of disparate factors on a case-by-case basis.
In applying its test, the Court upheld the lower court's certification of a class of delivery drivers. First (after skipping part A of the ABC test), the Court found that there was a sufficient commonality of interest as to whether part B of the ABC test was met because the hiring entity was a delivery company and the question of whether the work performed by the delivery drivers within the certified class is outside the usual course of its business was clearly amenable to determination on a class basis. Second, with regard to part C of the ABC test, the Court found that it was "equally clear" that there was a sufficient commonality of interest as to whether the drivers in the certified class were customarily engaged in an independently established trade, occupation, or business to permit resolution of that issue on a class basis because the class of drivers certified by the trial court was limited to drivers who performed delivery services only for Dynamex.
The Court's decision makes it more difficult to classify workers as independent contractors, and makes it more likely that such workers will be viewed as employees. Entities doing business in California that treat some workers as independent contractors should carefully review their classifications under the ABC test to determine if reclassification is warranted.
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