Over the past twenty years, labor law in California has become increasingly worker-friendly. In response, many businesses have adjusted by reclassifying workers as independent contractors, as opposed to employees. However, the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles reexamined and ultimately rejected the existing judicial standard for distinguishing contractors from employees. The Court introduced a new “ABC” test.
The new standard applies explicitly to claims that arise under wage orders issued by California’s Industrial Welfare Commission. The standard provides requirements for wages, hours and working conditions in various industries. It presumes workers to be employees and places the burden of showing otherwise on the employers. Employees have heavily regulated working conditions, hours, and wages. An employee classification makes the employer responsible for paying payroll taxes, unemployment insurance taxes and social security taxes, as well as social security, and worker’s compensation. Independent contractors don’t receive any of these benefits. The difference to a business’s bottom line can be stark, and misclassifications will likely result in heavy penalties.
The New Test
Under the newly adopted ABC test, a worker is deemed to be an employee for wage order purposes unless the employer shows:
(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;
(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.
Applying the Test: A Thought Experiment
Imagine a convenience store where the owner has hired a cashier to work the register and a plumber to fix pipes. Now let’s put each employee through the ABC test:
(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
The cashier answers directly to the owner in all facets of his job. The owner tells him how much he makes, when to arrive, and how he wants things done. The plumber, in contrast, has been hired to complete a task at the rate he charges. The owner doesn’t tell him how to do his work, the plumber exercises his own judgment in the performance of his task. Under the Dynamex test’s A-Prong this would indicate the cashier is an employee, while the plumber is a contractor. But all three prongs of the test must be satisfied in order for the standard to be reached. It’s still possible the plumber could be an employee. Let’s keep going….
(B) That the worker performs work that is outside the usual course of the hiring entity’s business
The usual course of business at a convenience store is to sell merchandise and that’s precisely what a cashier does. So again, the cashier is easily an employee under this prong. The plumber, on the other hand, fixes pipes, which has nothing to do with the store’s normal business. Once again, the plumber is looking like an independent contractor. But there’s still…
(C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed
This prong is simply asking whether the person doing the plumbing also independently engaged in the plumbing business? If the pipes at the store break and the owner brings in a plumber to fix them, that person is an independent contractor under this prong.
This example is very basic, but its purpose is merely to trace the shape of the Court’s new analysis of the relationship between worker and employer.
Already Changing Things
Dynamex is already starting to have reverberations in the courts. For example, Rushton Halbert vs. PRN Medical and Surgical Coverage LLC, a January 2019 decision made by Judge Michael P. Linfield of the Los Angeles Superior Court. The case hinged on whether the plaintiff, a physician’s assistant, was an employee or an independent contractor. Despite an earlier tentative decision that the defendant was an independent contractor, the judge abruptly reversed course and declared the defendant an employee, citing Dynamex.
Applying the test, the Court found that prong A wasn’t satisfied because the defendant clearly set plaintiff’s hours and wages. Prong B wasn’t met because the defendant’s business was about placing physician’s assistants in hospitals, precisely the activity the defendant was engaged in. Finally, defendant failed on prong C because, among other things, they had not provided any evidence plaintiff “had business cards, business licenses, business phones, or business locations” or had “received income from any party other than the hiring entity.”
Prior to Dynamex, the Court was going to go the other way with this decision. It’s just one example of how much is already changing.
Although there’s still much to be determined about when, and to whom, the ABC test applies, the Dynamex decision is starting to be unpacked by the lower courts. Notably, the California Court of Appeal recently ruled in Garcia v. Border Transportation Group, LLC that it doesn’t apply to cases not arising under a wage order. In such cases, the pre-Dynamex standard, known as the Borello Test, still applies.
The Dynamex decision will drastically remake the landscape for independent contractors in the California labor market. Businesses that rely heavily on independent contractors are going to have their work cut out for them in wage order cases (and whatever other disputes the courts eventually decide this standard applies in) and should seek qualified legal advice on how the Dynamex decision will affect their business.