California Supreme Court Adopts Simplified But Expansive “ABC Test” In Classifying Workers as Employees or Independent Contractors

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California Supreme Court Adopts Simplified But Expansive “ABC Test” In Classifying Workers as Employees or Independent Contractors

By Charles E. Noneman, Dwayne P. McKenzie, and Cathy T. Moses

The question of whether a worker should be considered an employee or an independent contractor carries significant financial and legal implications for employers. On April 30, 2018, in Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court adopted a new approach – called the “ABC test” – to answering this question for purposes of the California Industrial Welfare Commission wage orders, which impose various requirements on California employers relating to paying overtime and providing meal and rest periods, among other things. While the ABC test is intended, in part, to provide greater clarity and consistency of classification of workers as employees or independent contractors, application of the new test can be expected to result in many independent contractor relationships now qualifying as employment relationships under the wage orders. California employers will need to consider the potential impact of the Dynamex decision and imposition of the ABC test on their independent contractor relationships.

Background: Dynamex Drivers Sue Company in Class Action Lawsuit

The Dynamex decision involves a wage-and-hour class action lawsuit filed in 2005 against Dynamex, which is a nationwide same-day courier and delivery service that operates a number of business centers in California. Prior to 2004, Dynamex classified as employees drivers who performed similar pickup and delivery duties as then-current employees performed. However, in 2004, Dynamex adopted a new policy in which it made all of its drivers independent contractors. Dynamex drivers are required to provide their own vehicles and pay for all of their transportation expenses, such as fuel, tolls, vehicle maintenance, and vehicle liability insurance, as well as all taxes and workers’ compensation insurance.

Dynamex was sued by an individual plaintiff, Charles Lee, on his own behalf and on behalf of similarly situated drivers, for unfair business practices in violation of California Business & Professions Code section 17200 et seq., and certain Labor Code violations. 

The trial court certified a class of Dynamex drivers by relying upon alternative definitions in an applicable IWC wage order of the term “employ” to address the employee versus independent contractor inquiry. Those alternative definitions of “employ” were: (a) to exercise control over wages, hours or working conditions; (b) to suffer or permit to work; or (c) to engage, thereby creating a common law employment relationship. Dynamex claimed that the trial court should not have relied on those factors, and argued that a different test – the multifactor standard set forth in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations, 48 Cal. 3d 341 (1989) – was the only appropriate test in California for determining whether a worker was an employee or independent contractor. Under Borello, the California Supreme Court had recognized that various factors should be considered in determining whether an individual fell into one category or the other, including whether the person receiving services has the right to control the details of the work, the individual’s opportunity for profit or loss depending on managerial skill, whether the service rendered requires a special skill, and the degree of permanence of the job.

The Court of Appeal affirmed the trial court’s conclusion, holding that the applicable wage order’s definitions could be applied to the question of whether a worker was an employee or independent contractor. Dynamex then sought review in the California Supreme Court.

California Supreme Court Adopts the “ABC” Standard

In last week’s ruling, the California Supreme Court decided that the class of drivers could be certified based on the wage order definitions of “employ” and “employer,” and held that the “ABC test” should be used to determine a worker’s classification. The ABC test, which is used in other states including Massachusetts and New Jersey, presumes that workers are covered employees unless an employer can prove otherwise. Under the test, in order for a business to establish that a worker is an independent contractor who was not intended to be included within the wage order’s coverage, the hiring business must meet each of the following three ABC factors:

(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; and

(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.

The Court’s holding was rooted in the statutory scheme underlying the wage order claims at issue, which the Court discussed extensively. The Court noted that wage and hour statutes and wage orders were adopted in “recognition of the fact that individual workers generally possess less bargaining power than a hiring business,” and that the purpose of California wage orders is to ensure that workers are provided minimum wages and working conditions that will enable them to obtain a subsistence standard of living, and to protect their health and welfare. The remedial purposes of the wage orders thus played a critical role in persuading the Court that the ABC test, and presumption in favor of finding an employment relationship, should be adopted.

The Court discussed each of the three ABC factors in detail. With respect to (A), the Court stated that a business does not need to control the precise manner or details of work in order to be found to have maintained the necessary control that an employer possesses over employees.

With respect to (B), the Court offered various examples. When a retail store hires a plumber to repair a leak, that plumber’s services are not part of the store’s usual course of business and the store would not reasonably be seen as having permitted the plumber to provide services as an employee. In contrast, if a clothing company hires work-at-home seamstresses to make dresses from patterns provided by the company, those workers would be part of the hiring entity’s usual business operation. The Court emphasized that examining the nature of a worker’s role within the hiring entity would help protect those companies that in good faith comply with a wage order’s obligations against competitors in the same industry that trim costs by misclassifying workers.

Finally, with respect to (C), the Court emphasized that independent contractors should be individuals who independently take steps to promote their business, including by incorporating, advertising, or offering their services to the public or a number of potential customers. 

Importantly, under the ABC test, if a California hiring entity cannot establish any one of these factors, the worker must be treated as a covered employee for purposes of the wage orders.

Implications of the ABC Test

Application of the ABC test – which presumes that individuals are employees – may result in workers who previously were considered independent contractors in California now being deemed employees under the wage orders, which would trigger employer responsibilities such as payment of payroll taxes and overtime, and provision of meal and rest periods, and imposing potential legacy liability. California employers should conduct a thorough review and reevaluation of their worker classifications under the lens of the ABC test. Additionally, given that recent years have seen an increased emphasis on preventing employee misclassification, resulting in legislation imposing penalties for misclassification of employees as independent contractors, employers should ensure that going forward, persons making classification decisions on behalf of the employers are apprised of and apply the ABC test.

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