California Supreme Court Limits Employers’ Ability to Characterize Workers as Independent Contractors

JohnQuieroLE - resized [45] 170504_0034_1a_square2Guest Commentary

By John F. Querio, a Partner, and Lacey L. Estudillo, an Appellate Fellow, with Horvitz & Levy LLP.

California courts and administrative agencies have long used a multi-factor common-law test, as summarized by S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989), to determine whether workers are independent contractors or employees under California law.  The employee-independent contractor distinction is important because employee status brings with it a host of burdensome wage and hour and other legal obligations with which the employer must comply, multiplying costs exponentially.

The key factor under the Borello common-law test for determining employment status has traditionally been the right to control the manner and means by which the work is to be performed.  Despite decades of settled jurisprudence on this issue, in Dynamex Operations West, Inc. v. Superior Court, No. S222732, 2018 WL 1999120 (Cal. Apr. 30, 2018), the California Supreme Court adopted a new test for determining independent-contractor status for purposes of wage and hour obligations under California law.

In Dynamex, the court applied the “suffer or permit to work” standard—under which a worker is considered an employee if he or she is “suffered or permitted to work” even if not formally engaged as an employee—to the employee/independent contractor determination.

In applying this “suffer or permit to work” standard, the court followed a test that has been legislatively adopted in other jurisdictions, although not in California.  Under this so-called “ABC” test, a court “presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that 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 the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) 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.”  Dynamex, 2018 WL 1999120, at *29.

Until now, California courts had not used this rigid ABC test to decide whether workers are employees or independent contractors.  While each of the test’s elements were factors that courts could consider under Borello’s multi-factor totality-of-the-circumstances test, no one factor was determinative of independent contractor status under Borello.  By contrast, in cases alleging violations of a wage order (which are quasi-legislative regulations that govern wages, hours, and working conditions of employees in California), courts will now be required to apply the ABC test, under which an employer’s failure to satisfy any one of the test’s elements compels the conclusion that the worker is an employee.

The court even advised lower courts that, in the interest of efficiency, they may want to focus exclusively on part B or part C of the test, rather than trying “to resolve questions regarding the nature or degree of a worker’s freedom from the hiring entity’s control for purposes of part A of the standard.”  Accordingly, part A, which focuses on right of control and was at the heart of Borello’s common-law test for employee status, may be sidestepped altogether in cases where courts think businesses clearly cannot satisfy parts B or C.

The second element of the ABC test—part B, which focuses on whether the worker performs work that is outside the usual course of the hiring entity’s business—will be difficult for most companies to satisfy because “all individuals who are reasonably viewed as providing services to the business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor,” are considered to be within the “employee” category.  The court emphasized: “Competing businesses that hire workers who perform the same or comparable duties within the entities’ usual business operations should be treated similarly for purposes of the wage order.”

As examples of workers who would be employees rather than independent contractors under part B, the court cited “work-at-home seamstresses” who make dresses “from cloth and patterns supplied by the [clothing manufacturing company for which they work] that will thereafter be sold by the company,” as well as “cake decorators” who “work on a regular basis on [a bakery’s] custom-designed cakes.”

Under the third element of the ABC test—part C, which focuses on whether the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed—courts look at whether the worker is “an individual who independently has made the decision to go into business for himself or herself.”

Companies can satisfy part C by showing the worker took steps to establish and promote his or her business—for example, “through incorporation, licensure, advertisements, [or] routine offerings to provide the services of the independent businesses to the public or to a number of potential customers.”  The fact that a company neither prohibits nor prevents a worker from engaging in an independent business, however, does not establish that the worker has independently made the decision to go into business for himself or herself.

In this respect, the court emphasized that “[c]ourts in other states that apply the ABC test have held that the fact that the hiring business permits a worker to engage in similar activities for other businesses is not sufficient to demonstrate that the worker is ‘“customarily engaged in an independently established . . . business”’ for purposes of part (C) of that standard.”

Because a company’s failure to satisfy any one of the three parts of the new ABC test establishes that its worker is an employee for purposes of the wage order, the Dynamex decision will make it more difficult for companies to show their workers are independent contractors.  The precise impact of Dynamex will likely remain unclear for some time, as lower courts struggle with the scope and implementation of each factor of the ABC test, thereby increasing litigation costs to companies in California.  One thing, however, is certain: Dynamex will increase the cost of doing business in California and harm job creation and economic growth.

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