California Supreme Court Changes Rules for Classifying Workers as Independent Contractors by Adopting ABC Test in Some Circumstances

  • United States
  • 05/11/2018
  • Morgan Lewis

The April 30 ruling adopts the more stringent “ABC test” to distinguish between independent contractors and employees for purposes of claims based on California’s Wage Orders. Because satisfying this test is more difficult than the longstanding California “Borello” standard, California companies should review their independent contractor classifications under the new rules.

The California Supreme Court issued its decision on April 30 in Dynamex Operations West, Inc. v. Superior Court, announcing a new test to determine whether a worker is an independent contractor or employee for purposes of claims based on California’s Industrial Welfare Commission (IWC) Wage Orders (Wage Orders).

Background

Two delivery drivers sued Dynamex Operations West, Inc. (Dynamex), a nationwide same-day courier and delivery service, alleging that they had been misclassified as independent contractors instead of employees. Dynamex had previously classified its drivers as employees but converted them to independent contractors in 2004 in efforts to save costs.

According to the decision, Dynamex drivers were generally permitted to set their own schedule, determine the sequence of same-day deliveries, reject deliveries, deliver for other companies when not performing Dynamex work, and hire or contract with others to make Dynamex deliveries for them. The plaintiffs brought claims for violations of both the Labor Code and the applicable Wage Order, and sought to certify a class of drivers who performed deliveries directly for Dynamex within the class period. The proposed class excluded drivers who performed work via third-party hire or subcontract, or who hired their own employees or subcontractors to drive, as well as drivers who concurrently provided services to another delivery company.

The plaintiffs ultimately obtained class certification as to their proposed class. On appeal, the parties disagreed on what test governed the classification of independent contractors for purposes of alleged Wage Order violations. Dynamex argued that the multi-factor test set forth in S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341 should apply. This test has long been used by California courts to address independent contractor disputes. Plaintiffs argued that the test for joint employment of an employee interpreted in Martinez v. Combs (2010) 49 Cal. 4th 35 should apply.

The Decision

The California Supreme Court instead announced a new test for claims based on alleged Wage Order violations. The court focused on the “suffer or permit to work” definition of “employ” in the Wage Orders and held that this phrase must be interpreted broadly to cover all workers “who would ordinarily be viewed as working in the hiring business.” The court concluded that it was appropriate to use the “ABC” test to distinguish employees from independent contractors. Under this test, workers can be classified as independent contractors only if the hiring company demonstrates that the worker in question satisfies each of these three conditions: (a) that the worker is free from the control and direction of the hirer in 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© that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The court described this test as allowing for independent contractor classification of the type of individual workers “who have traditionally been viewed as genuine independent contractors who are working only in their own independent business.” The court noted that part B of the test requires that the work performed “is outside the usual course of business of the hiring entity.”

The court limited this “expansive definition of employment” to obligations imposed by a Wage Order. The court did not address the appellate court’s conclusion that the traditional Borello test applied to claims for reimbursement of business expenses under Labor Code Section 2802.

Applying the ABC test to the plaintiffs’ Wage Order-based claims, the court found that there was sufficient commonality to certify a class with respect to parts B and C of the ABC test.

Implications

The court’s adoption of the ABC test to distinguish independent contractors from employees will affect many companies that hire independent contractors in California. However, because the court limited its holding to obligations imposed by the Wage Orders, the Borello test will continue to apply to wage and hour claims not based on alleged Wage Order violations. Future litigation will focus not only on the ABC test, but also on which claims are subject to that test. The court did not address whether its adoption of the ABC test applies only on a prospective basis, and a request is pending before the court for clarification of this important issue.

Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Los Angeles
John S. Battenfeld

Orange County
Carrie A. Gonell
Daryl S. Landy
Barbara J. Miller

San Francisco
Robert Jon Hendricks
Eric Meckley

Silicon Valley
Melinda S. Riechert
Michael D. Schlemmer

https://www.morganlewis.com/pubs/california-supreme-court-changes-rules-for-classifying-workers-as-independent-contractors-by-adopting-abc-test-in-some-circumstances