Happy May Day, comrades. Yesterday, the California Supreme Court unanimously adopted the “ABC” test for independent contractor status in wage-hour law cases.  That test has been around a while, but it’s new to California jurisprudence.  The headline is that it will be nearly impossible for employers to classify individual service providers as independent contractors, except in narrow circumstances. What’s the ABC test?  Why does it strongly favor employee status? You ask a lot of questions. OK, read on.

First, a little background. The dispute arose in the context of a delivery company called Dynamex Operations West, Inc., and a class of its delivery drivers.  The drivers owned their own trucks, had a degree of autonomy in their daily activities, and were parties to independent contractor agreements. But they performed the very services Dynamex sold to its customers – delivery of packages, etc.  

The trial court certified a class of some of those drivers as allegedly mis-classified independent contractors.  In doing so, the trial court applied a definition of “employment” found in the California Industrial Welfare Commission Wage Orders that cover nearly all employees in California.  One of the definitions in the Wage Orders is an “employee” is someone that an employer “suffers or permits to work.”   Basically, that means an employee is anyone the employer allows to perform work for the employer, but the employer had the power to stop it.  It is a very broad definition.  The trial court in essence found that if the drivers could prove they met the definition of employee in the Wage Orders, they could prevail in their mis-classification suit  on a class-wide basis, and recover wages and penalties that employees are afforded, but contractors are not (such as overtime, minimum wage, meal and rest period premiums, etc.)  

Dynamex had argued that the trial court should not apply that expansive definition of employee contained in the Wage Orders.  (Wage Order 9 applied to Dynamex, but that doesn’t matter because the “employee” definition is consistent among all 17 Wage Orders). Rather, Dynamex argued that the proper analysis for determining independent contractor status is contained in the California Supreme Court’s multi-factor test for independent contractors that it announced in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.

With that background, the issue the Supreme Court set out to decide was whether the independent contractor relationship must be established through Borello’s analysis of many factors, or may the plaintiff win if s/he can prove that s/he was a covered “employee” under one of the three definitions contained in the Wage Orders.  

The unanimous opinion, authored by the Chief Justice, goes on for 85 pages.  There’s lots of historical analysis, comparison of different independent contractor tests, etc.  And that all led to the following:

First, the Court decided that in wage-hour cases alleging violations of provisions contained in Wage Orders, it is not necessary for employees to prove they are employees rather than contractors under the Borello test.  Rather, employees can establish they are employees by using the definition of employment in the Wage Orders. As the Court previously explained in Martinez v. Combs (2010) 49 Cal.4th 35, the Wage Orders’ definition of employee is:

“[t]o employ . . . under the [wage order], has three alternative definitions. It means: (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.” 

On the other hand, there’s no definition of “independent contractor” in the Wage Orders. So, if any of the above-quoted definitions applies, you’re not an independent contractor. You’re an employee.   If you’re “employ”ed under the Wage Order, and not “exempt” from the Wage Order, you’re entitled to all the goodness the Wage Order confers on employees, even if you might be an independent contractor in other contexts (such as for workers’ compensation purposes).  

The first prong is the traditional “necessary control” test, under which the hiring entity is in control of the manner and means of the work, and the worker cannot be an “independent” contractor.  The third prong of that test in Martinez is equivalent to the Borello standard.  

The Court here was concerned with the second part of the definition quoted above, I.e., what it means to “suffer or permit to work” in the context of independent contractors. The trial court applied this definition without any limitations, such that if you called a plumber from Roto-Rooter to your business and the plumber performs work, the plumber might be considered your employee (along with the Roto-Rooter business).  The Supreme Court realized that the definition of “suffer or permit” should not be that broad. The Court recognized that a business will have true “independent contractors” who might qualify under the “literal” definition of “suffer or permit to work.” 

So, after much discussion and analysis that I read so you don’t have to, the Court settled on what is referred to as the ABC test, variations of which are used in other jurisdictions. The Court decided that the “employer” / business / hiring entity has the burden of proving each of the following to establish an independent contractor relationship under the Wage Order:

a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (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 such 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 for the hiring entity. 

Because the employer must prove all three elements, if any one of them fails, the Wage Order applies. 

Factor “A” is the most fact-intensive standard, and is part of the normal “control” analysis that is applied in independent contractor cases, as quoted above from Martinez v. Combs. The employer has to show that the contractor decides the “methods and means” of accomplishing the work. Factor A also makes it important to have a written contract, spelling out the contractor’s independence. The Court did not go into whether Dynamex satisfied Factor A here, because it held that the plaintiffs could prevail by defeating Factors B OR C, or both.

Factor B means that there is no way to hire a contractor that performs the same services that the business sells to its customers.  Here’s how the Court explained it:

Workers whose roles are most clearly comparable to those of employees include individuals whose services are provided within the usual course of the business of the entity for which the work is performed and thus who would ordinarily be viewed by others as working in the hiring entity’s business and not as working, instead, in the worker’s own independent business. 

Thus, on the one hand, when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee. (See, e.g., Enforcing Fair Labor Standards, supra, 46 UCLA L.Rev. at p. 1159.) On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company (cf., e.g., Silent Woman, Ltd., supra, 585 F.Supp. at pp. 450-452; accord Whitaker House Co-op, supra, 366 U.S. 28), or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes (cf., e.g,, Dole v. Snell (10th Cir. 1989) 875 F.2d 802, 811), the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees.

* * * * 

Treating all workers whose services are provided within the usual course of the hiring entity’s business as employees is important to ensure that those workers who need and want the fundamental protections afforded by the wage order do not lose those protections. If the wage order’s obligations could be avoided for workers who provide services in a role comparable to employees but who are willing to forgo the wage order’s protections, other workers who provide similar services and are intended to be protected under the suffer or permit to work standard would frequently find themselves displaced by those willing to decline such coverage. 

With respect to Factor C, here is what the Court said:

the term “independent contractor,” when applied to an individual worker, ordinarily has been understood to refer to an individual who independently has made the decision to go into business for himself or herself. (See, e.g., Borello, supra, 48 Cal.3d at p. 354 [describing independent contractor as a worker who “has independently chosen the burdens and benefits of self-employment”].) Such an individual generally takes the usual steps to establish and promote his or her independent business — for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like. When a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor by the unilateral action of a hiring entity, there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification. A company that labels as independent contractors a class of workers who are not engaged in an independently established business in order to enable the company to obtain the economic advantages that flow from avoiding the financial obligations that a wage order imposes on employers unquestionably violates the fundamental purposes of the wage order. 

Of great importance, to pass muster under Factor C, the contractor must actually be in business for him/herself. It is not sufficient that the contractor agreement merely allows the contractor to work for competitors: 

The fact that a company has not prohibited or prevented a worker from engaging in such a business is not sufficient to establish that the worker has independently made the decision to go into business for himself or herself.

As you can probably see, Factors B and C likely mean the end of using the “independent contractor” agreement as a substitute for hiring a temp, or for “trying out” a an employee such as a manager.  If employees normally perform the work, or if an outsider would expect the hiring entity to perform the work with its own employees, no contractor relationship will fly.  Similarly, under Factor C, if the contractor doesn’t already have an established business, and engages in a “one-off” contract with the hiring entity, that will not satisfy the requirement. 

We’ll have a longer article on this significant case in the coming weeks. (If you don’t subscribe to our newsletter, you’ll miss out. Sign up at www.shawlawgroup.com.) Until then, a few caveats:

• The Court expressly limited its holding and endorsement of the ABC test to “claims that derive directly from the obligations imposed by the wage order.”  The Wage Order contains provisions such as overtime, meals and breaks, suitable seating, etc. But the Wage Order does not include other types of claims, such as expense reimbursement, paid sick leave, wage statements, and other Labor Code provisions. Therefore, employers must satisfy the ABC test and other legal standards (such as the Borello test) for independent contractor status. 

 

• There are some independent contractor relationships that are established by law. For example, doctors are not employees of hospitals, even though they provide the services that the hospital provides.  So, there may be some exceptions to the ABC test when other laws establish independent contractor relationships. 

 

• Outside salespersons are generally exempt from the Wage Order.  Will they be evaluated as independent contractors under the ABC Test, or under a different analysis?  Similarly, what about “exempt” professionals like lawyers or CPAs.  Can they be independent contractors even though they fail part of the ABC analysis (such as Factor B)? Stay tuned.  

 

This case is Dynamex Operations West, Inc. v. Superior Court and the opinion is here.