California Supreme Court Adopts “ABC Test” Limiting the Use of Independent Contractors

05.09.2018

On Monday, April 30, 2018, the California Supreme Court issued a highly anticipated decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles. In an extensive 82-page opinion, the Court adopted the so-called “ABC test” for determining whether a worker is an employee or an independent contractor for wage and hour claims arising under the Industrial Welfare Commission (IWC) Wage Orders. In doing so, the Court replaced the Borello test, which was the operative test for determining the employee-independent contractor status for nearly 30 years. The sweeping decision in Dynamex will have a tremendous impact on California employers as the newly adopted ABC test creates a more difficult burden for businesses to overcome the presumption that a worker is an employee of the company.

Background

Dynamex is a same-day courier and delivery service company that operates nationwide. In 2004, to cut business costs, Dynamex converted its delivery drivers from employees to independent contractors. In 2005, a delivery driver filed a class action lawsuit against Dynamex in the Superior Court for the County of Los Angeles, alleging that Dynamex misclassified drivers as independent contractors, resulting in unpaid overtime and violations of the Labor Code, and that Dynamex engaged in unfair and unlawful business practices under Business and Professions Code section 17200.

The trial court granted the drivers’ motion for class certification, relying on the definitions of “employer” set forth in the applicable Wage Order as discussed in the California Supreme Court’s decision in Martinez v. Combs (2010) 49 Cal.4th 35. In Martinez, a case involving joint-employer liability, the Court held that under the Wage Order, the term “employer” 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 to work.

Dynamex appealed, arguing that the broad definitions of “employer” set forth in Martinez should be limited to the joint-employer analysis, and that the appropriate test for determining whether a worker was properly classified as an employee or an independent contractor was the test set forth in the Supreme Court’s decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.

Under Borello, the primary consideration in determining employment status was whether the company had the “right to control” the manner and means by which the worker performed the work. The Borello analysis also considered several secondary factors including: whether the worker performing the services is engaged in a distinct occupation or business; the skill required in the particular occupation; whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; and whether the work is part of the regular business of the principal.

The Court of Appeal rejected Dynamex’s argument, and concluded the definition of “employer” in Martinez is not limited to the joint-employer context, but also applies to the employee-independent contractor analysis for claims arising under the Wage Order. The Court of Appeal also concluded that for non-Wage Order claims, Borello remains the test for determining whether a worker is an employee or an independent contractor. Dynamex appealed to the California Supreme Court, which granted review.

The Supreme Court’s Decision and the ABC Test

The Supreme Court upheld the Court of Appeal’s decision, holding the IWC has broad authority to define the employment relationship, and finding no basis to limit Martinez to the joint-employer context.

The Court rejected a literal application of the Wage Order’s “suffer or permit to work” definition of “employer” because that would result in workers who are truly independent contractors, such as certain plumbers, electricians, and attorneys, being classified as employees. Consequently, the Court adopted the ABC test for determining independent contractor status, replacing the more relaxed Borello standard.

Under the ABC test, a worker is presumed to be an employee, placing the burden on the employer to disprove the employer-employee relationship by affirmatively proving each of the following factors:

The worker is free from the control and direction of the hiring entity in the performance of the work, both under the contract for performance and in fact;
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Unless an employer proves all three requirements of the test, the worker will be considered an employee for claims arising under the Wage Orders, such as claims for unpaid wages and meal and rest break violations.

Impact on California Employers

The Dynamex decision and the ABC test will have a tremendous impact on employers by shifting the status of many workers from independent contractors to employees.

For example, Part B of the ABC test requires employers to prove the worker performs work that is “outside the usual course” of the employer’s business. In industries such as construction, trucking, and the gig economy, independent contractors who perform work within the company’s “usual course of business” often represent a sizable portion of the employer’s workforce. Under the ABC test, such workers would be deemed employees.

Because the Supreme Court limited its analysis in Dynamex to claims brought under the Wage Order, it remains unclear which test will apply when evaluating employment classification in non-Wage Order cases such as discrimination claims or claims for workers’ compensation benefits.

Dynamex does not change the definition of independent contractor under federal law. Thus, an individual may be an independent contractor under state law but not for federal purposes such as Social Security and payroll taxes. While such distinctions are relevant in litigating independent contractor disputes, from a practical standpoint businesses in California cannot choose to classify a worker as an independent contractor for some purposes and as an employee for other purposes. When deciding to classify a worker as an employee or independent contractor, the ABC test is determinative despite its initial narrow scope.

Businesses should immediately consult their legal counsel to examine their use of independent contractors, including any independent contractor agreements, to ensure compliance with the new standard adopted by the Court in Dynamex.