The California Supreme Court recently reached a decision in Dynamex Operations, Inc. v. Superior Court (Lee), No. S222732, a case which has far-reaching implications related to the use of independent contracts. The decision explained the standard for establishing that a worker is an independent contractor, versus an employee, and thus not covered under the California Wage Orders. In its decision, the Court adopted a new standard, referred to as the ABC Test.
Dynamex is a nationwide same-day courier and delivery service that operates a number of business centers in California. Dynamex initially classified its California drivers as employees and compensated them pursuant to the state’s wage and hour laws. In 2004, it converted all of its drivers to independent contractors after management concluded that such a conversion would generate economic savings for the company. Under the policy at issue, all drivers were treated as independent contractors and therefore not afforded the benefits provided under the Wage Orders, such as minimum wage guarantees, overtime pay, meal breaks, etc. Dynamex’s delivery drivers brought the suit as a class action, alleging that Dynamex had misclassified them as independent contractors rather than employees.
In determining the drivers’ status, the Court initially turned to the Wage Orders’ definition of employ, which is to "suffer or permit" to work. The Court noted the intended expansive reach of the suffer or permit to work standard along with the general principle that the Wage Orders are to be liberally construed in a manner that serves their remedial purposes. As such, it interpreted and applied the suffer or permit to work standard broadly to include all individual workers who can reasonably be viewed as working in the hiring entity’s business. It distinguished the type of worker that is traditionally considered an independent contractor—such as an independent plumber or electrician—from that of an employee in that a true independent contractor would not reasonably be viewed as working in the hiring entity’s business.
The Court held that: (1) the burden is placed on 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 (2) in order to establish a worker is truly an independent contractor the hiring entity must establish each of the three prongs embodied in the ABC test. Under the ABC test, a worker is properly considered an independent contractor to whom the California Wage Orders do not apply only if the hiring entity establishes: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such 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 for the hiring entity.
In applying the ABC test to the delivery drivers, the Court found that Dynamex could not show that the delivery drivers met the B or C prong of the test. Dynamex’s entire business was that of a delivery service, and it had previously classified the drivers as employees. Unlike a traditional independent contractor, the drivers were viewed as working in Dynamex’s business.
Implications and Unanswered Questions:
This case has broad implications for employees classified as independent contractors and employers using independent contractors as part of their workforce. Employers should examine their use of independent contractors to see if they meet all prongs of the ABC test. Furthermore, workers categorized as independent contracts should likewise evaluate whether they are properly classified as independent contractors. Employees are entitled to several protections under the California Wage Orders, including minimum wage, overtime pay, meal breaks, and other requirements contained therein.
The Dynamex decision did not specify whether it applies retroactively or not. At the moment, a request for clarification was submitted to the Supreme Court, and we are awaiting further guidance. There is, however, a strong argument that the decision does apply retroactively, because it appears to clarify existing law rather than create a new law. Furthermore, the decision is unclear regarding whether the ABC test applies to Labor Code violations or only to Wage Order violations. This uncertainty will likely lead to further litigation. In the meantime, if you have any questions regarding the Dynamex decision or how it may impact you, please feel free to contact the author of this article.