A stunning new decision by the California Supreme Court adopts a extremely broad, pro-worker standard for determining whether to classify a worker as an employee or independent contractor under California's Wage Orders. In so doing, the court refused to apply the more flexible " Borello" standard it had adopted nearly 30 years ago for workers' compensation cases, and which has been used by many courts in a variety of other settings, including wage and hour lawsuits.

The "employee versus independent contractor" question is crucial in a wide variety of labor and employment law matters, especially wage and hour law. California's Wage Orders impose obligations relating to minimum wages, maximum hours of work, meal and rest breaks, and other basic working conditions of California employees. However, independent contractors are not covered by these Wage Orders, or by Labor Code provisions relating to wages and hours of work.

In Dynamex Operations West, Inc. v. Superior Court , the court unanimously ruled that " all workers who would ordinarily be viewed as working in the hiring business " qualify as "employees" protected by the Wage Orders. However, the court added that the Wage Orders do not cover "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."

The court adopted a three-part standard, called the "ABC" test, to distinguish employees from independent contractors. Under this test, a worker is presumed to qualify as an employee, unless the employer (or "hiring entity") proves three things: (A) the worker is free from the entity's "control and direction" in connection with performance of the work, both as a matter of contract language and "in fact"; and (B) the worker performs work "outside the usual course" of the entity's business; and (C) the worker "is customarily engaged" in an independent business, occupation, or trade of the same nature as the work he or she performs for the hiring entity.

The court in Dynamex rejected the company's argument that it should apply the more flexible standard the court originally announced in 1989 in a workers' compensation case called S.G. Borello & Sons, Inc. v. Department of Relations . Under Borello , courts have applied a long list of factors to decide the "employee versus independent contractor" question, with the most important being the business entity's right to retain necessary control over the work.

However, although Borello remains the law in workers' compensation cases, and may be relevant in other labor and employment matters, the court in Dynamex decided that the Borello standard does not control the outcome in cases under California's Wage Orders. This means that a worker who qualifies as an independent contractor under Borello and workers' compensation law may nevertheless be an employee under Dynamex and the Wage Orders.

The Dynamex lawsuit was brought as a class action by delivery drivers against Dynamex, a nationwide package and document delivery company. Until 2004, Dynamex had classified most of its pickup and delivery drivers as employees. But in 2004, Dynamex adopted a new company policy and contract for its drivers which classified all drivers as independent contractors, even though the drivers insisted that their job duties did not change from when they were classified as Dynamex employees.

The lawsuit was filed in 2005, and has very slowly traveled up and down the court system ever since. The drivers claim that Dynamex misclassified them as independent contractors and violated the Wage Order governing the transportation industry (Wage Order No. 9), various Labor Code sections (including failure to pay overtime wages), and California's unfair competition statute.

A trial court judge granted class certification in the drivers' lawsuit. The class consisted of drivers who did not themselves "employ" other drivers to work for them, and who did not perform delivery work for other businesses or for their own personal customers. The class period dated all the way back to 2001, four years before the lawsuit was filed.

Dynamex filed petitions with the California Court of Appeal and, eventually, the California Supreme Court to review the order granting class certification. In deciding whether a class was properly certified, courts do not address whether the plaintiffs should prevail on their claims (the lawsuit has not been finally decided yet), or even whether they were correctly classified as independent contractors instead of employees. However, the courts must determine the standard for deciding the "employee versus independent contractor" question in order to determine whether the lawsuit meets the legal requirements for class certification.

The Supreme Court found that the class was properly certified as to the drivers' claims for violation of the Wage Order. As the court noted, the Wage Order includes three alternative definitions for the term "employ": (a) "to exercise control over the wages, hours or working conditions"; or (b) "to suffer or permit to work"; or (c) "to engage" and create "a common law employment relationship" (which is similar to the Borello standard).  

The court found that it only needed to look at the "suffer or permit to work" standard to decide that class certification was proper in the Dynamex case. It rejected Dynamex's argument that this standard applies only when deciding whether two or more entities are "joint employers," and instead found the standard to be highly relevant to the "employee versus independent contractor" issue.

As the court explained, California adopted the "suffer or permit to work" standard even before Congress enacted the federal wage-hour law, the Fair Labor Standards Act, which also follows this standard. The court described this as an "exceptionally broad" standard, and consistent with the "critically important objectives" of wage and hour law, which are to ensure workers "are provided at least the minimal wages and working conditions that are necessary to enable them to obtain a subsistence standard of living and to protect the workers' health and welfare."

The court also stated that "California's industry-wide wage orders are also clearly intended for the benefit of those law-abiding businesses that comply with the obligations imposed by the wage orders, ensuring that such responsible companies are not hurt by unfair competition from competitor businesses that utilize substandard employment practices." In addition, the Wage Orders' "minimum employment standards" are "for the benefit of the public at large, because if the wage orders' obligations are not fulfilled the public will often be left to assume responsibility for the ill effects to workers and their families resulting from substandard wages or unhealthy and unsafe working conditions."

The court reiterated that "the 'suffer or permit to work' standard must be interpreted and applied broadly." Under this standard, the definition of "employee" includes " all individual workers who can reasonably be viewed as ' working in the [hiring entity's] business. '" The term "independent contractor" applies only to a "traditional" type of contractor "who would not reasonably have been viewed as working in the hiring business ," such as an "independent" plumber or electrician who is reasonably understood to work " only in his or her own independent business ."

A hiring business must satisfy all three parts of the "ABC" test in order to prove that a worker is an independent contractor instead of an employee. Under Part A, the business must prove the worker is free from "the type and degree of control a business typically exercises over employees," both "as a matter of contractual right" and "in actual practice." Even if the business does not "control the precise manner or details of the work," it still might maintain enough control for the worker to be deemed an employee.

Under Part B of the test, an independent contractor's work must be of a type that "would ordinarily be viewed by others" as pertaining to "the worker's own independent business." For example, "when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store's usual course of business," and that person may be deemed an independent contractor.  However, if the individual's work is ordinarily viewed as "within the usual course of business" for the hiring entity, then the individual likely would be deemed an employee. Examples of this include "when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company," or "when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes."

Lastly, under Part C, the court emphasized that "the term 'independent contractor,' when applied to an individual worker, ordinarily has been understood to refer to an  individual who independently has made the decision to go into business for  himself or herself." Such a person typically takes steps "to establish and promote" an independent business - e.g., incorporation, licensure, advertisements, and the like. But when a hiring business unilaterally designates a worker as an independent contractor, "there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification." It is "not enough" for a company to prove that it "has not prohibited or prevented a worker from engaging in [an outside] business."

Applying this test, the state Supreme Court concluded that the trial court correctly found there was "sufficient commonality of interest" among the proposed class of drivers to support certifying the class. Under Part B of the test, the court noted that "Dynamex's entire business is that of a delivery service." This fact was sufficient, by itself, for the court to find "sufficient commonality" on the issue of whether the drivers' work was part of Dynamex's usual business, and was a proper basis for class certification regardless of Parts A and C of the test. Nevertheless, the court also found "sufficient commonality" under Part C, because the class definition was limited to drivers who "performed delivery services only for Dynamex," and excluded drivers who hired their own employees. 

What This Means For You

The Dynamex decision figures to make it more difficult for California businesses to successfully classify workers as independent contractors rather than employees. Parts B and C of the "ABC" test are especially problematic. Many workers currently designated as "independent contractors" do not operate their own independent business, nor do they perform the type of work that is usually part of a worker's independent business rather than part of the hiring entity's business.

Perhaps not coincidentally, the state Supreme Court encouraged lower courts to consider Part B and/or C "first," and recognized that they "may be easier and clearer" for lower courts to decide than Part A (which addresses the company's control and direction of the work). This may result in lower courts rejecting a company's independent contractor defense without even deciding whether Part A has been satisfied.

Even worse, the Dynamex decision provides a "road map" for plaintiffs' lawyers on the lookout for lucrative class action lawsuits in misclassification cases. As a result, it will be more difficult for businesses not only to win these cases, but also to avoid the expense and burden involved in class certification.

For years, we have cautioned California businesses to assume that every worker is an employee, and not to classify a worker as an independent contractor unless it is clear that relationship will pass muster if tested. The Dynamex decision will make it even more difficult for businesses to prevail on worker misclassification claims and to prevent such cases from being certified as class action lawsuits.

We can help with that analysis. If you have any questions about the matters discussed in this issue of Compliance Matters, please call your firm contact at (818) 508-3700, or visit us online at  www.brgslaw.com . 

Sincerely,
John J. Manier
Richard S. Rosenberg
Jeffrey P. Fuchsman
Ballard Rosenberg Golper & Savitt, LLP