The California Supreme Court published their long-awaited Dynamex decision on April 30, 2018. The court had been asked to determine which standards apply when evaluating whether workers are employees or independent contractors under California’s Wage Orders. Wage Orders in California dictate the wage, hour, and working condition requirements for specific industries, including the manufacturing industry, transportation industry, and agricultural occupations. The Industrial Welfare Commission (IWC) regulates these standards, including proper application of overtime wages, minimum wage, and other basic working conditions like meal and rest breaks. Employees receive protections under the Wage Orders, but independent contractors do not.
The plaintiffs in Dynamex argued that the workers in question were employees for purposes of the Wage Order, according to the standard set forth in a previous decision, Martinez v. Combs, while the defendant, Dynamex, argued that the workers were not employees, but rather properly classified as independent contractors using the standard set forth in S.G. Borello & Sons Inc. v. Department of Industrial Relations. which analyzes the totality of the circumstances of the relationship between the worker and the hiring party on a case by case basis, and where no one factor is determinative.
The California Supreme Court’s decision
The court chose to adopt neither test as it related to this Wage Order. Instead, the court adopted a version of the “ABC test”. Other states have adopted an ABC independent contractor test in their unemployment compensation statutes, however, the court in Dynamex chose to join only Massachusetts in their strict interpretation of the three prongs.
The court crafted a modified ABC test which severely narrows the standard by which a worker could possibly be classified as an independent contractor. First, there is a presumption that the worker is an employee. The burden is 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. Second, to meet this burden, the hiring entity must establish each of the three factors embodied in the ABC test:
- 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
- That the worker performs work that is outside the usual course of the hiring entity’s business; AND
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Failure to satisfy any of these prongs means that the worker should be classified as an employee for purposes of the wage order.
Most states structure the B prong of the ABC test to allow the hiring entity to show that the worker is properly classified as an independent contractor by showing that he/she works outside the usual course of the hiring entity’s business OR outside all the places of business of the hiring entity. This is where the California court deviates from the typical ABC test. The court in Dynamex eliminated this second piece of the prong, resulting in a single way to satisfy prong B; by proving that the work performed, falls outside the usual course of the hiring entity’s business, regardless of where the work occurs.
Dynamex ruling could have far-reaching consequences
Although it is not yet clear how far reaching the Dynamex ruling will be in terms of application to other claims in the state of California; for example, claims brought under California Labor Code, it is important to bear in mind that the fines and penalties related to worker misclassification in California are already tremendously onerous. The Dynamex ruling will certainly expand the instances under which workers will not qualify as independent contractors, and thus incur the fines and penalties already in place, in more circumstances than previously. It is therefore crucial for hiring parties in California, to re-examine their independent contractor populations to ensure that such workers are properly classified according the Dynamex ruling.