California Supreme Court Redefines Independent Contractor Test for Wage Orders

California Supreme Court Redefines Independent Contractor Test for Wage Orders


In a recent opinion, the California Supreme Court adopted a new test for determining whether a worker is an employee or independent contractor in certain contexts.  SeeDynamex Operations West v. Superior Court, (April 30, 2018) 4 Cal.5th 903, [232 Cal.Rptr.3d 1, 416 P. 3d 1]..  The Court adopted what is known as the “ABC” test used in other jurisdictions.  Under the test, a worker is an independent contractor only when the following are established: (A) 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) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) 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. (Id. at p. 8).  It is important to note however, this new test is limited (at least for now) to the application of Wage Orders which define the term “employ” as “to engage, suffer, or permit to work.”

The issue in Dynamex was whether Dynamex, a nationwide package delivery company, properly classified its drivers as independent contractors for purposes of Wage Order No. 9, which imposes minimum wage, maximum hours, meal, and rest break obligations on the transportation industry.  Prior to 2004, Dynamex classified their drivers as employees.  When the trial court denied Dynamex’s motion to decertify the class, Dyanmex filed a writ which was also denied by the Court of Appeal.  Dynamex then filed a writ of certiorari which was granted by the Supreme Court.

The Court Declines to Apply the Common Law Test for Determining Independent Status to Wage Orders

The precise issue before the Supreme Court was whether Wage Order definitions of the terms “employ” and “employer” as discussed in (Martinez v. Combs (2010) 49 Cal. 4th 35, 64), applied to the analysis of whether a worker is an employee or independent contractor instead of the multi-factor test set forth in the seminal case (S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341).  Thus, the Court of Appeal’s determination regarding the non-wage order claims regarding transportation expenses being subject to the common law test in Borello was not reviewed by the Supreme Court.

Under the common law test for determining independent status adopted in Borello, the key factor is control of the details of the work.  The Dynamex drivers were required to use their own vehicles and pay for their own transportation expenses, vehicle maintenance and liability insurance.  Dynamex drivers could work their own schedule provided they completed all assigned deliveries.  Drivers were also free to work for other companies and hire their own drivers.  Dynamex provided the customers and the routes, set the pricing and maintained a tracking system.  The trial court struggled analyzing the control element in determining whether to grant class certification to the Dynamex drivers.  The trial court found individual inquiry would be required to determine control.  Therefore, in order to uphold the class certification, the trial court looked to an alternative definition of “employer”, namely “to suffer, or permit to work” as defined in the Wage Order.

In upholding the application of the ABC test to Wage Orders, the Supreme Court attempted to reconcile its decision with Borello, rather than overturn it.  Borello, was decided in the context of the Workers’ Compensation Statute with “deference to the purposes and intended reach of the remedial statute at issue.” (Dynamex, 416 P. 3d 21).  Because the Borello decision emphasized statutory purpose as the “touchstone” for deciding whether a class of workers is properly classified as employees or independent contractors, the Supreme Court was able to justify its deviation from Borello in the case of Wage Orders.

Application of the ABC Test           

In applying the ABC test to the Dynamex drivers, the Supreme Court noted a finding of any one of the three factors is independently determinative.  Therefore, under factor “B” there is commonality of interest as both the class plaintiffs and Dyanmex are engaged in the delivery business, which is sufficient to find the workers are employees of Dynamex.  Likewise, factor “C” results in a finding of employee status because the workers were not engaged in an independent trade such as plumber, electrician, etc…  The Supreme Court goes on to state it is the employer’s burden to establish it meets all three ABC factors; failure to do so results in the worker being classified as an employee for the purposes of a Wage Order.  (Dynamex, supra, at 48).  Finally, the court’s explanation for its holding is rooted in public policy to prevent employers from subverting the legislative intent underlying the Wage Orders through misclassification, thereby avoiding payroll taxes and workers’ compensation insurance premiums.

The Takeaway          

In light of the significant holing in Dynamex, California employers subject to Wage Orders are cautioned to consult with legal counsel to determine if their employee v. independent contractor  classification policy is consistent with the newly adopted ABC test or face significant exposure to back wages and attorney’s fees.

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