The California Supreme Court issued a landmark decision on April 30, 2018, in Dynamex Operations West, Inc. v. Superior Court, in which it adopted a new worker-friendly standard for determining whether workers are properly classified as employees or as independent contractors. In doing so, the Supreme Court abandoned its more flexible, multifactor test in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989) (“Borello”), which had been in place for nearly 30 years, in favor of the more narrow three-pronged “ABC test” used in several other jurisdictions.

The following presents a more detailed review of the California Supreme Court’s decision, along with a discussion of its potential impact on companies with California workforces.

Decision: In Dynamex, two delivery drivers filed a class action lawsuit against Dynamex, a nationwide same-day courier and delivery service provider, alleging that it had misclassified its delivery drivers as independent contractors rather than employees. The drivers claimed that the misclassification resulted in violations of California’s Wage Order No. 9, which governs the transportation industry, as well as several provisions in the California Labor Code and California’s Unfair Competition Law. Dynamex claimed that the drivers were properly classified as independent contractors under the Borello multifactor test. The drivers provided their own vehicles; paid their own transportation expenses, including fuel, tolls, vehicle maintenance and liability insurance; and were generally free to set their own schedules and to choose the sequence in which they made deliveries and the routes they would take. The drivers were also permitted to hire other persons to make deliveries assigned by Dynamex and to work for other delivery companies as long as they did not divert any delivery orders received through or on behalf of Dynamex to a competing delivery service.

The trial court granted class certification to a class of drivers who, during the relevant time periods, performed delivery services only for Dynamex and who did not have employees of their own. The question before that court was whether the definition of “employ” in Industrial Welfare Commission (IWC) Wage Order 9, which “means to engage, suffer, or permit to work,” is the appropriate legal standard for determining whether a worker should be considered an employee or an independent contractor under the wage order. Dynamex took the position that the question of a worker’s status as an employee or independent contractor must be decided solely by reference to the Borello standard. The trial court disagreed, holding that the “suffer or permit to work” definition of “employ” in the wage orders applies in the independent contractor context. The court further explained that the California Supreme Court’s previous decision in Martinez v. Combs, 49 Cal.4th 35 (2010), a joint employer case that discussed the three alternative definitions of “employ” and “employer” set forth in the IWC Wage Orders, is not limited to the joint employer context.

The Court of Appeal upheld the trial court’s class certification order, concluding that neither the provisions of the wage order itself nor the Supreme Court’s decision in Martinez supported the argument that the IWC Wage Orders’ definition of “employ” and “employer” are limited to the joint employer context and are not applicable to the independent contractor assessment. However, with respect to those claims that fall outside the scope of the wage order, such as the plaintiffs’ Labor Code section 2802 reimbursement claim, the Court of Appeal concluded that the Borello standard applied.

The California Supreme Court sided with the drivers in a unanimous decision, concluding that the “suffer and permit to work” definition of “employ” contained in the IWC Wage Orders may be relied on in evaluating whether, “for purposes of the obligations imposed by the wage order,” a worker is an employee or is “properly considered the type of independent contractor to whom the wage order does not apply.” The Supreme Court explained that “the wage order’s suffer or permit to work definition must be interpreted broadly to treat as ‘employees,’ and thereby provide the wage order’s protections to all workers who would ordinarily be viewed as working in the hiring business.” However, the Supreme Court cautioned that the definition “cannot be interpreted literally in a manner that would encompass within the employee category the type of individual workers, like independent plumbers or electricians, who have traditionally been viewed as genuine independent contractors who are working only in their own independent business.”

The California Supreme Court imposed the burden on the hiring entity to establish that a worker is an independent contractor excluded from the IWC Wage Orders’ protections and held that the ABC test used in several other jurisdictions to distinguish employees from independent contractors would govern that issue. Under the ABC test, a worker is properly classified as an independent contractor only if all three of the following conditions are met:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under contract and in fact; and

  2. The worker performs work that is outside the usual course of the hiring entity’s business; and

  3. 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.

Condition A: Freedom from the hiring entity’s control and direction

Condition A of the test is generally a restatement of part of the Borello test that focused on the employer’s right to control the manner and means by which a worker performs work. The Supreme Court explained that a worker who is subject, either as a matter of contractual right or in actual practice, “to the type and degree of control a business typically exercises over its employees” is not an independent contractor. Importantly, “a business need not control the precise manner or details of the work in order to be found to have maintained the necessary control that an employer ordinarily possesses over its employees.” Indeed, the Supreme Court quoted the Virginia Supreme Court’s holding that “[t]o reduce part A of the ABC test to a matter of what time of day and in whose chair the [worker] sits when the product is produced ignores the protective purposes of the [applicable] law.”

Condition B: Performing work outside the usual course of the hiring entity’s business

Condition B aims to determine whether the individuals are “reasonably viewed as providing services to the hiring entity’s business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor.” The California Supreme Court gave several examples of workers who would qualify as employees rather than contractors, such as a work-at-home seamstress who uses cloth and patterns supplied by a clothing manufacturing company to make dresses for the company that will thereafter be sold by the company or a cake-decorator who regularly works for a bakery on its custom-designed cakes. By contrast, outside plumbers or electricians who repair or install items for a retail store are not employees because “the services of the plumber or electrician are not part of the store’s usual course of business.” A key question is thus whether the services provided by the worker are an “integral part of the [hiring entity’s] business” or “merely incidental” to it.

Condition C: Customarily engaged in an independently established trade, occupation or business

Condition C of the ABC test is meant to ensure that an independent contractor is an individual who “independently has made the decision to go into business for himself or herself.” According to the Supreme Court, “[s]uch 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 services . . . to the public or to a number of potential customers, and the like.” The Supreme Court noted 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.”

Impact of the Dynamex Decision: Determining whether a worker is appropriately classified as an independent contractor in California has long been a difficult, fact-intensive question for businesses, and the misclassification of workers can have significant consequences for companies operating in California, in particular liability for failure to comply with California’s wage and hour laws (e.g., minimum wage and overtime, meal and rest periods, itemized wage statement). The Supreme Court’s decision will thus have a significant impact on the manner in which many businesses do business in California, particularly in light of the Supreme Court’s holding that businesses bear the burden of establishing that their independent contractors are properly classified and that all workers are presumptively employees. As a result, companies that use independent contractors in California should reexamine their contractual relationships with their independent contractors to assess compliance with the ABC test and should in many cases use competent California employment counsel to advise them. (We note that the Supreme Court’s decision addressed only the test under the IWC Wage Orders, leaving for another day the issue of whether the ABC test applies in other contexts, such as with respect to expense reimbursement claims under Labor Code section 2802.)