Supreme Court Decision – Employee vs. Independent Contractor

On April 30, 2018, the California Supreme Court dealt a blow to the so-called “gig economy”* by adopting use of the ABC Test as used in other jurisdictions for purposes of ascertaining whether a worker is an employee or an independent contractor.

In the case of Dynamex Operations West Inc. v Superior Court (2018), the California Supreme Court examined the misclassification of workers as independent contractors rather than employees and the impact that misclassification has on both federal and state governments by depriving them of billions of dollars in tax revenue and millions of workers of the labor law protections to which they are entitled.

The issue the court was asked to decide was which test to apply in a wage and hour class action alleging that the plaintiffs were misclassified as independent contractors.

Dynamex is a nationwide same day courtier and delivery service that operates a number of business centers in California. They offer on-demand, same day pick-up and delivery services to the public and also have a number of large business customers. Prior to 2004, Dynamex classified its California drivers as employees and compensated them per the state’s wage and hour laws. In 2004, Dynamex converted all of its drivers to independent contractors after management concluded that would generate economic savings for the company. Under the current policy all drivers are treated as independent contractors and are required to provide their own vehicles and pay for all of their transportation expenses including fuel, tolls, vehicle maintenance, and vehicle liability insurance as well as all taxes and workers’ compensation insurance.

Dynamex obtains its customers and sets the rates to be charged to those customers for their delivery services. It negotiates the amount to be paid to the drivers on an individual basis. For drivers assigned to dedicated fleet or scheduled routes by Dynamex, they are paid either a flat fee or an amount based on a percentage of the delivery fee Dynamex gets from the customer. On-demand delivery drivers are generally paid either a percentage of the delivery fee paid by the customer on a per delivery basis or a flat fee basis per item delivered.

Drivers can set their own schedule but must notify Dynamex of the days they intend to work for Dynamex. Drivers performing the on-demand work are required to obtain and pay for a Nextel cell phone through which the drivers maintain contact with Dynamex. Drivers are sometimes required to attach Dynamex and/or the customer’s decals to their vehicles when making deliveries for that customer. Drivers purchase Dynamex shirts and other Dynamex items with their own funds and are generally expected to wear Dynamex shirts and badges when making deliveries for Dynamex.

Dynamex reserves the right throughout the contract period to control the number and nature of deliveries that it offers to the on-demand drivers.

A class action suit was filed in 2005 alleging that the Dynamex drivers have performed essentially the same tasks in the same manner as when the drivers were classified as employees but Dynamex has improperly failed to comply with the requirements imposed by the Labor Code and wage orders for employees with respect to the drivers.

The court was to decide which test to apply in a wage and hour class action alleging that the plaintiffs had been misclassified as independent contractors. The court was presented with two options. First was the broader wage order definition of “to employ” as construed in Martinez v Combs (2010) 49 Cal.4th 35, 64 or, second, the narrower Borello test (S.G. Borello & Sons, Inc. v DIR (1989) 48 Cal.3d 341). The court instead adopted the broader wage order “suffer or permit to work” employee standard from the wage order at issue and adopted the ABC Test.

Under the ABC Test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes three criteria:

A. 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 such work and in fact;
AND
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, the worker should be considered an employee and the hiring business an employer.

This is the correct test under the “suffer or permit to work” standard, which was one of three definitions of “to employ” in the wage orders at issue in the Martinez case.

What this means for you:

The burden of proof is placed squarely on the hiring entity (employer) to prove each of the three factors of the ABC Test. Failure to prove any one of the three is sufficient in itself to establish that the worker is an employee rather than independent contractor for purposes of the wage order at issue.

*A Gig Economy is an environment in which temporary positions are common and organizations contract with independent workers for short-term engagements.