Last week, the California Supreme Court dramatically reshaped how to determine whether a worker is an independent contractor or an employee entitled to overtime, meal and rest periods, and other labor protections enshrined in the Industrial Welfare Commission’s (“IWC”) Wage Orders. While the method endorsed by the Court—the  so-called “ABC Test”—is arguably simpler and more predictable than the multi-factor test some employers may be familiar with, the end result is the narrowest definition of independent contractor to date.   This will result in much greater risk exposure to employers who utilize independent contractors.

The case, Dynamex Operations West, Inc. v. Superior Court, was brought by drivers working for a delivery service who alleged that the company misclassified them as independent contractors, committing numerous violations of IWC Wage Order No. 9 as a result. The trial court ruled that the drivers could establish that they were employees, rather than independent contractors, if they proved that the company suffered or permitted them to work. The company appealed, arguing that the “suffer or permit” standard was improper in this context. After the Court of Appeal affirmed the decision below, the California Supreme Court considered the issue and likewise affirmed.

Background

This ruling upended years of precedent on the distinction between employees and independent contractors. In 1989, the California Supreme Court decided S.G. Borello & Sons, Inc. v. Department of Industrial Relations, ruling that the principal factor in determining a worker’s status was “whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result performed.” The Borello court also listed nine factors relevant to the inquiry, including whether the worker was engaged in a distinct occupation or business, the length of the relationship, and whether the worker provided his or her own tools.

Then, in 2010, the California Supreme Court held in Martinez v. Combs that because the Wage Orders defined “employ” in part to mean “suffer or permit to work,” that broad standard could determine whether a defendant was a plaintiff’s employer. However, Martinez involved a joint employment claim; it was undisputed that one defendant employed the plaintiffs and the question was whether other entities could be held liable as employers as well. The defendant in Dynamex thus argued that Martinez only endorsed the use of the “suffer or permit” standard in joint employment contexts. The Supreme Court unanimously rejected this argument, and then established the “ABC Test” as the method to put the “suffer or permit” standard into practice.

The New “ABC Test”

The new test endorsed by the court is known as the “ABC test” after its three prongs. A worker is presumed to be an employee unless the employer meets its burden of proving that each of the below prongs is satisfied.

1. The worker must be free from the control and direction of the putative employer in how he or she carries out his or her tasks. This is consistent with other independent contractor tests in which detailed control typically establishes an employment relationship.
2. The worker must perform a task that is outside the normal scope of business of the putative employer. For example, a worker who services a bakery’s air conditioning probably satisfies this prong, while a worker who decorates cupcakes at the bakery likely does not.
3. The worker must be customarily engaged in an independent business or trade, reflecting an independent decision on the part of the worker to go into business for him or her self.

If any of these conditions are not met, the worker is an employee entitled to the protections of the IWC’s Wage Orders, including overtime, meal and rest periods, and required days of rest.

For now, the Court’s holding is limited to rights guaranteed by the Wage Orders; it has no effect on determining whether a worker is an employee for Fair Employment and Housing Act (“FEHA”) purposes, for vicarious tort liability, and even for labor protections not found in the Wage Orders such as the right to be reimbursed for certain employment expenses. (For information on California Wage Orders, click HERE.)  However, the Dynamex ruling may be a harbinger of things to come, and its ultra-narrow definition of independent contractor could spread to other areas of law in the next few years.

Takeaways for Employers

• Be very careful classifying workers as independent contractors. Workers are now presumed to be employees for wage and hour purposes and can only be independent contractors in narrow circumstances. A worker that performs tasks that are a core part of your business is almost certainly an employee for Wage Order purposes.
• Be prepared for the effect of the Dynamex ruling to expand. Right now the ABC Test only applies to wage and hour rules contained in the Wage Orders. However, in the coming years courts or the California Legislature could choose to extend the use of the ABC Test to non-Wage-Order labor protections, the Fair Employment and Housing Act, Workers’ Compensation, and state tax issues, among others.
• Consult with qualified counsel about classifying workers as independent contractors. If an employer is found to have misclassified workers as independent contractors, the exposure in California is very costly and includes both wages such as overtime and severe monetary penalties.  Some employers wrongly assume that just because they have a signed independent contractor agreement, they have no risk of misclassification.  That is a common mistake.  While having a well-drafted, signed independent contractor agreement is advisable, it definitely does not by itself mean that a court or administrative agency will find an independent contractor relationship.  Instead the decision will be based on the law and, in the case of issues involving claims related to the California Wage Orders, the decision will be based on the new ABC Test adopted in the Dynamex case.
• Learn More. The Dynamex case and its broader implications will be discussed along with other new employment law developments, at our Mid-Year Employment Law Update for California Employers on June 7, 2018. To register call any of our offices or register online at: suttonhague.com/events.