The ABC’s of Worker Classification: The California Supreme Court’s New Dynamex Standard Expands Employee Protections

Standard

I.  Introduction: Employers should review their practices in regard to using contractors’ services to comply with the expanded definition of “employ” under Dynamex.  

The gig economy – in which companies have expanded the use of independent contractors over employees – has raised concerns among employee rights advocates and some governmental officials over the welfare of workers.  That concern appears to permeate the April 30, 2018 decision by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, __ Cal.5th __, 2018 WL 1999120 (Apr. 30, 2018).

But the decision can be expected have a much broader impact, reaching to more traditional industries in which companies have often relied upon independent contractors, because of the expanded definition of “employ”.  The Court holds that, for purposes of the wage orders governing wage and hour obligations of California employers, the definition of “employ” presumes that a worker is the employee of a hiring entity, unless the entity can show (A) that the entity lacks control and direction over work performance, and (B) that the work in question is outside the usual course of the entity’s business, and (C) that the worker’s work for the entity is of the same nature as the independently established trade, occupation or nature in which he or she is customarily engaged.

While the opinion is likely to result in years of litigation and appeals ferreting out the uncertainties the new standard creates, hiring entities should promptly review their hiring and contracting practices to adapt, in the following ways:

  1. Companies should carefully review their practices for hiring contractors to perform work at their facilities. The initial question should be whether, in light of the expanded definition of “employ” and “employer” under California’s wage orders, retaining workers as contractors rather than employees provides a sufficient benefit to the company to justify either the risk of liability based on misclassification or a restructuring of the relationship between the company and the worker.
  2. If the work performed by workers retained by a company is the kind of work normally performed in the usual course of its business, then it should consider taking steps to classify those workers as employees. While in many cases, the determination that the work is or is not what is normally performed in the usual course of business will be clear, in other cases, the company should seek legal counsel for advice on how such close calls are likely to be resolved in the courts.
  3. If a company wants to classify as contractors workers whose work is not in the normal course of the company and who are customarily engaged in an independently established trade of the same nature as that work, then the company needs to establish safeguards to assure that it does not assert control or direction over the performance of the work. A company should seek legal counsel to establish appropriate safeguards.
  4. If a company wants to classify as contractors workers whose work is not in the normal course of the company and over whose work performance it lacks control and direction, it should make sure that the workers are customarily engaged in an independently established trade, occupation or business of the same nature of that work.
  5. When taking these steps, companies need to consider that the Dynamex decision emphasizes the strong public policy focused on protecting workers, which underlies the expansive definition of “employ”. Therefore, courts are likely to bend toward finding an employment, rather than independent contractor, relationship.

II.  In Dynamex, the California Supreme Court justifies the expansion of the “employee” classification based upon the purpose of California Wage Orders to protect worker’s wages and benefits.

In Dynamex, the Court focused on one of the three definitions of the term “to employ” – “to suffer or permit to work” – in the California wage orders that establish wage and hour obligations for California employers, and interpreted that definition broadly to include as employees “all workers who would ordinarily be viewed as working in the [business that hired them].”  (Emphasis in original.)

A.  The “ABC Test” imposes on companies the burden to justify classification of workers as contractors by showing all prongs of a three-part test related to the level of control over work performance and the nature of the work.

The Court further determined that, a company, which the Court refers to throughout the opinion as the “hiring entity,” has the burden to rebut the presumption of an employment relationship, to justify treatment of the worker as an independent contractor “to whom a wage order does not apply.”  The presumption is rebutted only if the hiring entity can show:

“(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; (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.”

This so-called “ABC standard” broadens the circumstances in which a worker must be deemed an employee and a hiring entity deemed an employer subject to the wage and hour obligations under the wage orders.

B.  The Dynamex decision addresses the definition of “employ” and “employer” in the context of California wage orders, but leaves open whether the definition will be expanded to apply to other labor statutes.

The California Supreme Court described its precedent pertinent to the issue of employee-contractor classification.  The prior cases used a narrower (although not narrow) test to determine whether a worker for a hiring entity was an independent contractor or employee.  In a case addressing whether farmworkers should be classified as employees or independent contractors for purposes of applying the workers compensation statutes, S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), the California Supreme Court had instructed that, in determining what test to employ in interpreting the term “employee” in a statute or wage order, a court had to focus on the statutory purpose of the protective legislation.  Therefore, the Court

“concluded that in determining whether a worker should properly be classified as a covered employee or an excluded independent contractor with deference to the purposes and intended reach of the remedial statute at issue, it is permissible to consider all of the various factors set forth in prior California cases, in Labor Code section 2750.5, and in the out-of-state cases adopting the six-factor test.”

In other words, the Borello Court “was not adopting ‘detailed new standards for examination of the issue.’”  Factors established by statute or pertinent treatises could “overlap those pertinent under the common law.  [Citation.]  Each service arrangement must be evaluated on its facts, and the dispositive circumstances may vary from case to case.’”  A six-factor test used in other states could be pertinent as well.

The Dynamex Court characterized Borello “as call[ing] for application of a statutory purpose standard that considers control of details and other potentially relevant factors identified in prior California and out-of-state cases in order to determine which classification (employee or independent contractor) best effectuates the underlying legislative intent and objective of the statutory scheme at issue.”

The Court next described its decision in Martinez v. Combs, 49 Cal.4th 35 (2010), in which the Court addressed “the meaning of the terms ‘employ’ and ‘employer’ as used in California wage orders, although not in the context of whether workers were employees or independent contractors.  The Court explored the history of how the term “employ or suffer or permit” a person to work came to be used in the definition in California wage orders.  Derived from statutes regulating and prohibiting child labor adopted in the early 1900s throughout the country, the terms were used to expand the protection of the laws to relationships that did not fit in the common law master and servant relationship.  The intent was to “reach[] irregular working arrangements the proprietor of a business might otherwise disavow with impunity.”  And the Court observed that the use of those terms in the wage orders was useful in “reaching situations in which multiple entities control different aspects of the employment relationship . . . .”  Ultimately, the Court concluded that the wage orders’ definitions of the employment relationship are applicable in a civil action.

In the last case discussed by the Court, Ayala v. Antelope Valley Newspapers, Inc., 59 Cal.4th 522 (2014), a wage and hour class action alleging that newspaper carriers had been misclassified as independent contractors rather than employees, the Court teed up and left open the question “whether in a wage and hour class action alleging that the plaintiffs have been misclassified as independent contractors when they should have been classified as employees, a class may be certified based on the wage order definitions of ‘employ’ and ‘employer’ as construed in Martinez . . . or, instead, whether the test for distinguishing between employees and independent contractors discussed in Borello, is the only standard that applies in this setting.”

The Dynamex Court determined that basing the applicability of the wage order on its definition of employment in the wage order, rather than the Borello standard, was appropriate.  Two rationales compelled use of that definition:  First, courts “must respect the IWC’s [California’s Industrial Welfare Commission’s] legislative authority to promulgate the test that will govern the scope of the wage order.”  Second, the “wage order . . . purposefully adopts its own definition of ‘employ’ to govern the application of the wage order’s obligations that is intentionally broader than the standard of employment that would otherwise apply.”

In light of the purposes of the wage orders and the inherent “disadvantages, particularly in the wage and hour context,” of relying upon “a multifactor, all the circumstances standard for distinguishing between employees and independent contractors,” the Court found it appropriate “to interpret that standard as: (1) placing the burden on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the wage order’s coverage; and (2) requiring the hiring entity, in order to meet this burden, to establish each of the three factors embodied in the ABC test . . . .”

III.  Conclusion

On its face, the new standard for classifying workers as independent contractors or employees to determine applicability of the obligations under the wage orders appears to offer more certainty to companies.  The presumption that workers are employees supports that certainty.  The three factors that a company must show to justify classifying workers as independent contractors leave substantial room for interpretation.  But the Court’s strong admonition about the breadth of the wage orders’ definition of “employ” and “employer” in light of the history of those definitions when they were first adopted, indicates that courts are likely to side with workers in interpreting any ambiguity in the factors.  Application of the expanded standard to worker classification issues in other statutory contexts, where the definition of “employ” and the purpose underlying the statute may differ, is uncertain.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s