On Monday, April 30, 2018, the California Supreme Court issued a landmark decision in the matter of Dynamex Operations West, Inc. v. Superior Court of Los Angeles. In a voluminous, 82-page decision, the California Supreme Court reinterpreted and ultimately rejected the Borello test for determining whether workers should be classified as either employees or independent contractors for the purposes of the wage orders adopted by California’s Industrial Welfare Commission (“IWC”) in favor of a worker-friendly standard that may upend the existing independent contractor labor market.

In particular, the Court embraced a standard presuming that all workers are employees instead of contractors, and placed the burden on any entity classifying an individual as an independent contractor of establishing that such classification is proper under the newly adopted “ABC test” which will be discussed in further detail below.

Background

Dynamex is a nationwide same-day courier and delivery service that offers on-demand, same-day pickup and delivery services to businesses and the public. Prior to 2004, Dynamex classified its California drivers as employees. Starting in 2004, however, Dynamex converted all of its drivers to independent contractors as a cost savings measure.

In January 2005, Plaintiff Charles Lee entered into a written independent contractor agreement with Dynamex to provide delivery services for the company. Just three months after leaving his work at Dynamex, Lee filed this lawsuit on his own behalf and on behalf of similarly situated Dynamex drivers, alleging that Dynamex’s alleged misclassification of its drivers as independent contractors led to Dynamex’s violation of the provisions of IWC wage order No. 9, the applicable state wage order governing the transportation industry, as well as various sections of the Labor Code, and, as a result, that Dynamex had engaged in unfair and unlawful business practices under Business and Professions Code section 17200.

After an earlier round of litigation in which the trial court’s initial order denying class certification was reversed by the Court of Appeal, the trial court ultimately certified a class action, relying on the three alternate definitions of “employ” and “employer” set forth in the applicable wage order and as discussed in the Supreme Court’s decision in Martinez v. Combs, 49 Cal.4th 35, 64 (2010) (“Martinez”).

In Martinez, the Court held that to “employ” has three alternative definitions: (1) to exercise control over the hours, wages, or workings conditions, (2) to suffer or permit to work, or (3) to engage, thereby creating a common law employment relationship. Notably, the “suffer or permit to work” definition was derived from statutes regulating and prohibiting child labor laws dating back to the early 1900s and imposed liability simply “based on the defendant’s failure to exercise reasonable care to prevent child labor from occurring.” Martinez at 58. Such a definition, of course, goes far beyond the traditional common law employment relationship. The Martinez case, however, only involved a joint employer analysis—which is conceptually distinct from the question of whether a worker is an employee or independent contractor in the first place.

In response, Dynamex filed a writ petition in the Court of Appeal, maintaining that definitions (2) and (3) do not apply to the classification analysis. In particular, Dynamex argued that definitions (2) and (3) as construed by Martinez define who is a joint employer of an undisputed employee of some entity and that the commonly relied upon multifactor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989)(“Borello”) applies to threshold questions of whether a worker is an employee or independent contractor.

In Borello, the Supreme Court held that the “right to control” the means and manner in which work is performed by a worker is the most important of several factors to be considered when evaluating a classification analysis, including secondary factors such as ownership of equipment, opportunity for profit and loss, and the belief of the parties. This test is more flexible because it balances the different factors to arrive at a classification based on individual circumstances of each case. Prior to Dynamex, many cases (including the Court’s own recent decisions) referred to the multi-factor Borello test as the traditional “common law” classification analysis.

The Court of Appeal rejected Dynamex’s argument, and concluded that Martinez is not limited to the joint employer context but also applies to the classification analysis. The Court of Appeal also rejected the contention that the multifactor test set forth in Borello is controlling in cases arising under an obligation imposed by an IWC wage order.

Consequently, the California Supreme Court granted review to clarify the appropriate standard for determining employee or contractor status in the wage order context.

The Supreme Court’s Decision

As a threshold matter, the Court framed its decision by broadly characterizing the misclassification of independent contractors as harmful and unfair to workers, honest competitors, and the public as a whole. The Court provided a long, detailed, and nuanced analysis of the relevant case lineage, carefully analyzing Borello, Martinez, and Ayala v. Antelope Valley Newspapers, Inc., 59 Cal.4th 522, 527 (2014). In doing so, the Court read each of these cases and their respective holdings in a decidedly worker-friendly fashion.

In particular, the Court interpreted the Borello test as going beyond the traditional common law classification analysis, and that it instead “calls for the application of a statutory purpose standard … to determine which classification … best effectuates the underlying legislative intent and objective of the statutory scheme at issue.” That is, the Court clarified that it reads Borello to stand for the proposition that the remedial purpose of any employment legislation (such as the workers’ compensation laws at issue in Borello) must always be taken into account in the classification analysis.

The Court also held that Ayala (which applied Borello to wage and hour claims while clarifying that Borello embodies a “right to control” as opposed to actual control test) does not resolve the question of whether Borello is applicable to wage order claims, because the parties agreed and the employee conceded that Borello was the proper test in that case.

With respect to Martinez, and whether it is limited to the joint-employer context, the Court reasoned that Martinez recognized that the IWC’s broad authority to define the employment relationship is not limited to “only the common law definition” and that the language used by the IWC to define the employment relationship was understood to encompass irregular working arrangements that fell outside the common law, including the child labor example discussed above. Thus, the Court found no basis to limit Martinez’s scope to just the joint employment context.

The Court therefore rejected Dynamex’s argument that Martinez is limited to joint employment questions and that Borello’s “right to control” test is controlling. Thus, under Martinez, a worker is an employee if he or she is “employed” by an “employer,” and “employ” is defined as: “ (a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.” If any of these standards are met, the worker is an employee and not an independent contractor.

The Court, however, conceded that the “suffer or permit to work” standard is a “term of art” that cannot be interpreted literally because it would obviously encompass workers who are traditional independent contractors (e.g. plumbers) and would more or less eviscerate the commonly understood distinction between employees and independent contractors. Consequently, the Court limited the scope of “suffer or permit to work” by adopting the “ABC test.”

The ABC Test

Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the putative employer proves:

(A) that 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 the work and in fact;

(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 the work performed.

Note that each of these requirements need to be met in order for the presumption that a worker is an employee to be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor.

What This Means For California Businesses

The question of whether an individual worker should be classified as an employee or independent contractor has considerable significance for workers, businesses, and the public generally. If a worker is classified as an employee, the employer bears the responsibility of paying Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and of course, complying with the endless labyrinth of state and federal statutes governing the wages, hours, and working conditions of employees.

Indeed, many businesses, particularly those operating in the “gig economy,” are fundamentally premised on the use of independent contractors. In light of this case, any businesses operating in California that treat workers as independent contractors should confer with their legal counsel to review the relationship under the “ABC test” and determine whether any or all such workers should be reclassified.

For example, prong B of the ABC test is particularly troublesome for any businesses that use independent contractors to deliver or provide their core product or service. In applying the ABC test to Dynamex, the Court noted that a class of delivery drivers could be certified under prong B because the question of whether the delivery drivers were performing outside the usual course of Dynamex’s business could clearly be resolved on a classwide basis. Indeed, delivery services—which are provided by the delivery drivers—are the very core of Dynamex’s business.

Lastly, it is not yet clear whether the ABC test applies to wage claims that do not arise from a wage order. For example, a claim for reimbursement for business expenses such as fuel and tolls that are not governed by a wage order and are obtainable only under section 2802 of the Labor Code may still be controlled by the Borello test. Indeed, this was the holding of the Court of Appeal in Dynamex, and the Supreme Court stated that it was not reaching the issue. Also left open by the Supreme Court’s decision is whether the “exercises control over the wages, hours or working conditions” prong of the wage orders’ definition of “employ” is applicable to classification questions outside the joint employment context.