May 2018 Employment Law Update

CA SUPREME COURT DRAWS BRIGHTER LINE REGARDING CLASSIFICATION OF EMPLOYEES VS. INDEPENDENT CONTRACTORS

On April 30, 2018 the California Supreme Court issued a unanimous opinion that has wide reaching consequences for employers doing business in the State of California that seek to classify workers as independent contractors rather than employees – at least in the context of California’s wage orders, which impose obligations relating to minimum wages, maximum hours, and basic working conditions (such as required meal and rest breaks).

In Dynamex Operations West, Inc. v. Superior Court of Los Angeles, the Court concluded that in determining the existence of independent contractor relationship, California will adopt a standard for making this determination that begins with a presumption that all workers are employees and places the burden on the hiring entity to show that there is an independent contractor relationship.  Unless a hiring entity is able to satisfy each prong of the newly-embraced ‘ABC Test,’ the contractor will be deemed to be an employee rather than an independent contractor for purposes of all applicable wage orders (workers’ compensation, minimum wage, overtime, etc.)

In Dynamex, class certification was sought by delivery drivers of the nationwide courier service Dynamex for a determination that the company was misclassifying the drivers as independent contractors and thus violating the applicable wage order.  Prior to 2004, Dynamex classified its delivery drivers as employees, but a shift in economic thought from management led to a reclassification of its drivers for purposes of generating savings for Dynamex.  This business model may sound familiar and is prevalent in the so-called “gig-economy” such as Lyft, Uber, and other online applications and platforms that offer the goods and services of others.

The company maintained that the oft-utilized Borello standard, that utilizes a multi-factor test designed to determine the hiring entity’s ability to control the worker, should be controlling as to the threshold question of whether a worker is an employee.  As many of you may know, that test is very gray and difficult to apply other than on a case by case basis.  The California Supreme Court has not definitively rejected that test in favor of an easier to apply test that includes in the definition of “employ” the much broader “suffer or permit to work” definition the Court used in the joint-employer context.

However, the court also observed that the broad “suffer or permit to work” standard, if applied literally, would likely encompass unquestionably independent contractors such as plumbers, electricians, and architects who are truly independent.  Therefore the Court adopted the so-call “ABC Test.” Under the newly embraced ABC Test, to show a worker is not an employee but instead a true independent contractor, a hiring entity now must satisfy each of the following prongs:

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 of 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 of the same nature as the work performed

This broad and expansive classification of workers into employee status rather than independent contractor will have far reaching consequences for all hiring entities in California that currently rely on independent contractors.  Even if they do not control the hours, means or methods of the work performed, many California employers will not be able to successfully meet the “B” and “C” prongs of the ABC Test with workers who are currently classified as independent contractors.  And previous or ongoing failures to correctly classify these workers exposes entities who rely on independent contract classifications for their workers are even more exposed to misclassification claims on a class-wide basis.

There remain several strategies employers can use to protect against these types of crippling class action claims, and to smoothly transition their contractors to an employment relationship going forward.  If you have any questions about how this decision may affect your operations, and if we can help, please reach out to Solomon Ward Seidenwurm & Smith LLP.