United States: The New ABC's Of Independent Contractor Classification In California

Executive Summary: On April 30, 2018, in the landmark decision Dynamex Operations West, LLC v. Superior Court of California, the California Supreme Court established a new test for determining who qualifies as an independent contractor under California's Wage Orders. Under the new test, known as the "ABC test," workers will be considered employees who are "suffered or permitted to work" under the Wage Orders unless an employer can establish three factors:

  1. That 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
  2. That the worker performs work that is outside the usual course of the hiring entity's business, and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The decision, which will likely be a seminal independent contractor case for years to come, will have both immediate and longstanding impacts on the use of independent contractors in California.

Case Background

In Dynamex, the California Supreme Court was asked to determine which standards apply when evaluating whether workers are employees or independent contractors under California's Wage Orders. The Wage Orders are industry-specific requirements created by the Industrial Welfare Commission that impose obligations relating to minimum wages, overtime, and other basic working conditions for employees. The Wage Orders, however, do not apply to independent contractors.

In Dynamex, the plaintiffs were package delivery drivers who alleged that Dynamex had misclassified them as independent contractors and violated various aspects of the Wage Order applicable to the transportation industry (Wage Order No. 9). They further alleged that they and other "independent contractors" were also misclassified and were owed overtime wages, wage statement penalties, and business expense reimbursements under the California Labor Code. The plaintiffs claimed that even though they were hired as independent contractors, they had performed essentially the same tasks in the same manner as Dynamex drivers who were classified as employees. Dynamex denied the claims, asserting that the plaintiffs were properly classified as independent contractors.

At class certification, the parties wrestled over the proper standard to determine whether a worker is an employee or independent contractor for purposes of the Wage Orders. The plaintiffs asserted that the proper standard is set forth in Martinez v. Combs, 49 Cal. 35 (2010). In Martinez, the California Supreme Court addressed the proper standard for determining joint employment under the Wage Orders, holding that the Wage Orders embodied three alternative definitions of what it means to "employ" someone:

  1. To exercise control over the wages, hours or working conditions, or
  2. To suffer or permit to work, or
  3. To engage, thereby creating a common law employment relationship.

Dynamex argued that the Martinez test only applies to joint employers and is not the proper test to determine if independent contractors are employees. Dynamex asserted that the proper test to determine if workers are independent contractors under the Wage Orders is the long-standing common law test for independent contractors set forth in S.G. Borello & Sons, Inc. v. Dep't of Indus. Rel., 48 Cal. 3d 341 (1989), which requires a case-by-case weighing of various factors. The trial court ultimately sided with the plaintiffs and held that the Martinez test applies to independent contractors for purposes of claims brought under the Wage Order (e.g., minimum wages, overtime, meal and rest periods, etc.). Based on that determination, the trial court granted certification, holding that the first two Martinez definitions of an employee could be tried through common proof. That portion of the holding was affirmed on appeal, setting the stage for the Supreme Court to address the issue.

The California Supreme Court ultimately agreed with the trial court's granting of class certification, but found the trial court's application of the "suffer or permit to work" standard under Martinez was too broad. The Court found that the "to suffer or permit to work" definition of employee properly applies to the question of whether a worker should be considered an employee or independent contractor, and, contrary to Dynamex's argument, it does not apply only to "joint employers" but rather applies broadly to all workers who would ordinarily be viewed as working in the hiring business (though, the Supreme Court did not address whether the same can be said for the first definition of employee, which was used in the joint employer context in Martinez). Notably, the Supreme Court insisted that inclusion of "to suffer or permit to work" does not change the classification of certain types of individual workers, such as independent plumbers or electricians, who have traditionally been viewed as genuine independent contractors working only in their own independent business.

To provide some clarity to the issue, the Supreme Court detailed the applicable standard California courts are required to utilize to determine if a worker qualifies as an employee or independent contractor under the "suffer or permit to work" definition. The Court found that it was appropriate and consistent with the history and purposes of the standard to interpret it as requiring 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 that such a showing must be made by establishing each of the three factors embodied in the ABC test:

  1. That 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
  2. That the worker performs work that is outside the usual course of the hiring entity's business, and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

In this particular case, the Supreme Court upheld class certification, because, although the trial court used a broader interpretation of "suffer or permit to work," parts B and C of the ABC test could be evaluated with common proof. Specifically, the high court held that commonality existed because delivery drivers engaged in the common practice of driving to deliver packages for Dynamex, and the workers at issue in the class action were only those that contracted directly with Dynamex.

Employers' Bottom Line

Businesses and hiring entities should conduct careful analyses of the amount of control they have over independent contractors' work, the type of work any contractors perform, and the background of any contractors hired to determine whether the hiring entity can establish all three of the foregoing prongs of the ABC test. If the hiring entity cannot establish all three prongs of the ABC test to determine whether the workers are being "suffered or permitted to work," the worker should be classified as an employee and not an independent contractor for purposes of the Wage Orders.

As such, employers are strongly advised to have their hiring policies and practices examined to ensure compliance with these standards and to avoid future lawsuits and potential civil penalties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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