Independent Contractors—The Dynamex Case
The California Supreme Court’s Dynamex Decision creates a revolution for California workers and hard decisions for California businesses.
It has now been over a year since the California Supreme Court handed down its decision in Dynamex Operations West Inc. v. The Superior Court of Los Angeles which completely changed the test for determining whether a worker was an independent contractor or an employee. The difference between a worker being an independent contractor versus being deemed an employee is huge and could upend many businesses which have relied on workers being deemed independent contractors for years (think Uber and Lyft).
As a bit of background, since 1989 the determination of independent contractor versus employee status in California was based upon an 8 factor test adopted in the case of S.G Borello & Sons v. Department of Industrial Relations. This 8 factor test made it relatively easy to classify a worker as an independent contractor because if a company could satisfy at least 4 or 5 or more of the factors, there was little doubt that the worker would be deemed an independent contractor and not an employee. There was an assumption that if a worker signed on as an independent contractor, he/she would be treated as an independent contractor unless proven otherwise, with all the benefits and drawbacks to being an independent contractor. Countless California businesses have been formed or operated utilizing independent contractors due primarily to the ease with which independent contractors could be engaged and terminated along with the absence of providing employee benefits and job protections afforded to employees. On the other hand, workers were accorded the flexibility to perform work when and where they wanted. I believe many companies, particularly new start-ups, were more willing to utilize independent contractors because of these characteristics.
Then on April 30, 2018 the California Supreme Court decided the Dynamex case in which the Borello 8 factor test was replaced with a much stricter “ABC” test consisting of the following factors:
- Is the worker free from control and direction in connection with performing the work assigned both under the contract for performance and in fact;
- Is the work being performed outside the usual course of the hiring entity’s business, and
- Is the worker customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
Under this new “ABC” test you can see that the plumber, attorney or accountant would still qualify as independent contractors. But what about Uber drivers, hair stylists, or IT people developing new computer applications for start-up high tech companies? Under the ABC Test the assumption changes to one that assumes every worker is an employee unless proven otherwise. Under this scenario companies like Uber and Lyft could become two of the largest “employers” in California! Likewise, California franchisors might be forced to become “employers” of their franchisees and the franchisee’s employees.
To make matters even more interesting, in May, 2019 the California Ninth Circuit Court of Appeals held that the Dynamex decision must be applied retroactively which means workers misclassified as independent contractors could have recourse to claim damages (ie pay and benefits) going back 2 or 3 years. Incredibly, the Ninth Circuit claimed retroactivity was appropriate because the Dynamex decision was only a “clarification rather than a departure from established law”. So controversial was this decision that on July 22, 2019 the Ninth Circuit withdrew its May decision and certified the question to be considered by the California Supreme Court.
Furthermore, competing Bills have been introduced in the California State Legislature; one aimed at codifying the ABC Test as a statute (making it the law of the land and much harder to change) while another Bill aims to lessen the impact of the ABC Test by exempting varies industries and professions.
Federal agencies have further clouded the issue. The US Department of Labor has found workers classified as independent contractors in the gig economy to indeed be independent contractors under the Fair Labor Standards Act. Similarly, the National Labor Relations Board has found many independent contractors to be properly classified as such, not employees, under the National Labor Relations Act.
In the meantime, most California businesses using independent contractors seem to be taking a “wait and see” attitude waiting for either worker groups or the California Attorney General to start filing lawsuits at which time companies will be forced to decide whether to fight or switch.
Article by Roger D. Linn © Barnett & Linn