The Supreme Court of California recently issued a decision that essentially rewrites the standard for determining whether someone is an employee, a move that could jeopardize businesses that utilize independent contractors in the Golden State. The court ruled in Dynamex Operations West, Inc. that the test for establishing whether one is an employee should be far more rigid than the multi-factor standard that had been in place for almost thirty years.
The case involves drivers for Dynamex, a nationwide package and document delivery company, which allegedly misclassified its drivers as independent contractors rather than as employees. Two drivers filed a complaint against the company accusing Dynamex of violating California’s Industrial Welfare Commission Wage Order Number 9, which regulates wage and hour issues in the transportation industry, and state labor laws.
In a lengthy opinion, the court addressed the history of judicial efforts to distinguish between an employer-employee relationship and that of an independent contractor and noted that the origins of that question arose from whether a purported employer should be liable for the actions of an individual acting on its behalf. It further noted, “the question whether the hirer controlled the details of the worker’s activities became the primary common law standard for determining whether a worker was considered to be an employee or an independent contractor.”
Courts in California generally used the common law standard until 1989, when the state supreme court issued a decision in S. G. Borello & Sons, Inc. v Dept. of Industrial Relations in which it established an eleven-factor test for determining employment status.
The Dynamex court rejected the Borello test and replaced it with the so-called ABC test that several states have adopted. The court’s new formula requires that a purported employer satisfy all three of the following conditions in order prove an individual is not an employee:
(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.
The court noted that in many states a common element of the ABC test “provide[s] that a hiring entity may satisfy part B by establishing either (1) that the work provided is outside the usual course of the business for which the work is performed, or (2) that the work performed is outside all the places of business of the hiring entity.” (emphasis added)
However, the court deliberately removed the latter element from part B of its new standard, which will make it difficult to classify an individual as an independent contractor unless that person has essentially no connection to the employer’s business. In other words, employers in California that rely on independent contractors are about to discover that the California supreme court may have just put their business model in jeopardy.