United States: California Supreme Court Upends Independent Contractor Test For Wage Claims

Linda Auerbach Allderdice is a partner in Holland & Knight's Los Angeles office and Phillip Schreiber is a partner in Holland & Knight's Chicago office

HIGHLIGHTS:

• The California Supreme Court's widely anticipated decision in Dynamex Operations West, Inc. v. Superior Court sets a new standard for determining employee versus independent contractor status for purposes of California Wage Orders.
• The Court adopted the definition of "employ" that is contained in the state's Industrial Welfare Commission Wage Orders; that is, whether the hiring entity had "suffered or permitted" the individual to work.
• Every California business that has used the independent contractor business model is likely to feel the effects of this decision for years to come, and will have to address difficult questions concerning the continued viability of the contractor model.

The California Supreme Court issued its widely anticipated decision in Dynamex Operations West, Inc. v. Superior Court on April 30, 2018, setting the standard for determining employee versus independent contractor status for purposes of California Wage Orders.

In brief, the Court decided, with respect to classification questions "for purposes of California wage orders," that an earlier decision of the court, in Martinez v. Combs, 49 Cal. 4th 35, 64 (2010), governed the analysis of employee versus contractor status.

The Decision

Relying on Martinez, the Court adopted the definition of "employ" that is contained in the state's Industrial Welfare Commission Wage Orders; that is, whether the hiring entity had "suffered or permitted" the individual to work. The Court rejected the argument that it should follow the multifactor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989), which set the standard to distinguish employees from independent contractor generally accepted up to this point. Although recognizing that Martinez did not directly involve the issue of whether the workers in question were employees or contractors but instead focused on the issue of joint employer liability for wages, the Court adopted the Martinez decision's findings as they related to the meaning of the terms "employ" and "employer."

The Court did not stop with this pronouncement. The Court went on to adopt a standard commonly referred to as the "ABC" test which must be applied in the analysis to determine whether the underlying standard – to suffer or permit to work – is satisfied. The "ABC" test, requires satisfaction by the business of each of the following elements for a worker to be considered a contractor rather than an employee: "(A) 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 (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."

Notably, the Court stated that, "the suffer or permit to work definition is a term of art that cannot be interpreted literally in a manner that would encompass within the employee category the type of individual workers like independent plumbers or electricians, who have traditionally been viewed as genuine independent contractors who are working only in their own independent business."

As applied to the facts before it, the Court allowed plaintiff delivery drivers who challenged their independent contractor status under Wage Order No. 9, which covers the transportation industry, to proceed with a class action against Dynamex, a nationwide same-day courier and delivery service that operates business centers in California. What was particularly persuasive to the Court was that the drivers who were hired by Dynamex performed essentially the same work in the same manner as they had performed when they were classified as employees. In granting class certification, the Court adopted a particularly expansive reading of the Martinez standard, "suffer or permit to work." For example, the Court held that the standard is not limited to a "joint employer" relationship, but rather could "cover a variety of entities that have a relationship with a workers' primary employer, for example, a larger business that contracts out some of its operations to a subcontractor but retains substantial control over the work." In short, while the court seemingly extended liability to the subcontractor relationship in this instance, it also noted that the contracting parties can contract which party reimburses the other party.

Ultimately, the Court ruled that for claims arising from the obligations of the Wage Orders, which the Court recognized as "constitutionally-authorized, quasi-legislative regulations that have the force of law," the test under Martinez would control. However, for other causes of action not arising from the Wage Orders, such as California Labor Code provisions that do not have Wage Order counterparts, the Borello decision might be applied as the governing standard. An example of such a claim cited by the Court was to recover business expenses under Section 2802 of the Labor Code.

Conclusion and Takeaways

The Dynamex decision is like a California earthquake, with a sharp shake at first, followed by aftershocks that continue sometimes for years. Every California business that has used the independent contractor business model will feel the effects of this decision for years to come, and will have to address difficult questions concerning the continued viability of the contractor model. Further, given the expansive discussion by the Court as to the application of the "suffer or permit to work" standard to a variety of business relationships in California, it will be important for businesses in the state to ensure that contractual relationships properly reflect the parties' allocation of responsibility for wage and hour violations.

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