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A Potentially Disruptive Ruling for California Employers

On April 30th the California Supreme Court issued an opinion that almost certainly will cause significant changes in how many businesses, particularly those which rely on independent contractors, will conduct their California operations in the future.  The 82-page ruling in Dynamex v. Superior Court is predicted to seriously impact the business model of many companies in the “gig” economy, and perhaps far beyond as well.

The issue in Dynamex was whether the defendant company had properly classified as independent contractors its delivery drivers under a California wage order and the Labor Code.  The company had used a multi-factored test established by the California Supreme Court in its 1989 decision in S. G. Bordello & Sons, Inc. v. Department of Industrial Relations.  The Bordello test used as its primary criterion an examination of how much control the company exercised over how the work was performed, although numerous other factors were also considered.

The plaintiff in Dynamex argued, however, that a different standard, articulated in a more recent case, should be used.  That standard is “suffer or permit to work,” which would establish an employer-employee relationship virtually any time a company had work performed.

The Court did not go so far as to completely adopt the “suffer or permit” test but it did essentially eviscerate the “control” standard of Bordello.  It adopted instead a three-part test to determine if the “suffer or permit” test had been met, starting with a presumption that a worker is an employee instead of a contractor.  The new test is called the “ABC test.”  Under it, a purported employer must prove each of the three prongs in order to establish that the worker is an independent contractor.  The three prongs are:

A – The company doesn’t control or direct the manner in which the work is performed;

B – The work that is performed is “outside the usual course” of the company’s business; and

C – The worker is “customarily engaged in an independently established trade, occupation, or business” in the same line of work as that performed.

The Court was concerned about what it perceives to be a “continuous serious problem of worker misclassification as independent contractors,” which it believes has weakened the wage and hour protections that California has intended to provide its citizens and has resulted in an unfair competitive advantage to companies who rely on independent contractors as compared to “honest” companies which rely on employees.  In effect, the decision is an attempt to return the workplace to a more traditional model.

Like most important legal decisions, the Dynamex ruling raises many questions that California employers will have to sort out.  For one, does Dynamex apply to worker classification issues outside of the wage order arena?  If it does, how much control can a company exert before it runs afoul of category “A”?  Is someone who does piecework in their home on an occasional basis to earn extra income, but whose work is consistent with the company’s business, an employee?  To what degree can potential independent contractors be encouraged to form their own businesses to provide services within the category “C”?  These and myriad other questions will have to be addressed as California businesses adjust to the new standard used to distinguish between employees and independent contractors.