Depending on the circumstances, the answer to this question could be worth millions of dollars.  It could also spell the difference between success and disaster: e.g., the possible collapse of the modern day on demand cyber economy (Uber, Lyft, grocery delivery, etc.)  Thus, every day scores of lawsuits are fought over this very point.  For many, the business of filing and prosecuting such lawsuits is “big business.”

Unfortunately, in California the answer is not as simple as one might think (or hope).  Radically different tests apply depending on the circumstances.  As explained by the California Supreme Court in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989) (“Borello”), “whether a worker should properly be classified as a covered employee or an excluded independent contractor” must be determined “with deference to the purposes and intended reach of the remedial statute at issue ….”  Hence, citing policy concerns, last year in Dynamex Operations W. v. Superior Court, 4 Cal.5th 903, 929 (2018) (“Dynamex”) California’s high Court instructed lower courts to henceforth apply the so-called “ABC” test developed in other jurisdictions for wage order violations (an alleged violation of one or more orders issued by California’s Industrial Welfare Commission (“IWC”) setting overtime wages, hours and working conditions for workers.)1 Under the newly approved ABC test, all workers are now presumptively considered employees, and might only be classified as independent contractors if the hiring entity establishes all three of the following factors: (A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work; (B) the work performed is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

In other words, under the ABC test, it is now extraordinarily difficult to prove any worker is not an employee.

Dynamex refused to say whether the ABC test applies to the related question of payment of employee expenses.  Instead, for procedural reasons, the Court explained “that issue is not before us” and did not disturb a lower court order applying the pre-existing “right of control” test to expense reimbursement disputes.  Since then, at least one unpublished California decision and two federal decisions have held “[t]he ABC test applies only to claims arising under Industrial Welfare Commission Wage Orders.”  Karl v. Zimmer Biomet Holdings, Inc. (N.D.Cal. Nov. 6, 2018, No. C 18-04176 WHA) 2018 U.S.Dist.LEXIS 189997, at *7, citing California Trucking Ass'n v. Su, 903 F.3d 953, 959, fn.4 (9th Cir. 2018). 

Accordingly, for now at least, one is left to assume the common law right of control test, not the new ABC test, applies when workers sue claiming their expenses have not been properly reimbursed. 

The right of control test was first explained in Borello.  It was later more exactingly defined in Ayala v. Antelope Valley Newspapers, Inc. 59 Cal.4th 522 (2014).  Ayala explains:

  • [W]hat matters under the common law [test endorsed by Borello] is not how much control a hirer exercises, but how much control the hirer retains the right to exercise … The existence of such right of control, and not the extent of its exercise, gives rise to the employer-employee relationship …  It is not a question of interference, or non-interference, not a question of whether there have been suggestions, or even orders, as to the conduct of the work; but a question of the right to act, as distinguished from the act itself or the failure to act.” … Whether a right of control exists may be measured by asking “ ‘ “whether or not, if instructions were given, they would have to be obeyed” ’ ” on pain of at-will “ ‘ “discharge[] for disobedience.” ’ ” 

(59 Cal.4th at 533, italics added, internal citations omitted.)  Ayala further explains:

  • In cases where there is a written contract, to answer that question without full examination of the contract will be virtually impossible … written agreements are a “significant factor” in assessing the right to control … “Written agreements are of probative significance” in evaluating the extent of a hirer's right to control …  
  • … Perhaps the strongest evidence of the right to control is whether the hirer can discharge the worker without cause, because “[t]he power of the principal to terminate the services of the agent gives him the means of controlling the agent's activities.” 

59 Cal.4th at 533-35 (italics added; internal citations omitted); citing Malloy v. Fong, 37 Cal.2d 356, 370, 232 P.2d 241 (1951).

Borello and Ayala also “recognize a range of secondary indicia … that may in a given case evince an employment relationship.”  Ayala, 59 Cal.4th at 531; quoting Borello, 48 Cal.3d at 351.  Those secondary indicia …

  • … include (a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee … “Generally, ... the individual factors cannot be applied mechanically as separate tests; they are intertwined and their weight depends often on particular combinations.” 

(Borello, 48 Cal.3d at 350-51, internal citations omitted.)

In sum, under the right of control test, unlike the ABC test, a worker is not presumed to be an employee; rather, the burden is on the worker to show, by contract or otherwise, his or her “employer” reserved the right to control important aspects of his or her work.  A company sued for failing to pay expenses has much more to argue in court given the comparative vagaries of the right of control test.  On the other hand, the capstone of a company’s reserved control is its right to fire a worker with or without cause.  Whether the employer actually ever exercised this, or its other reserved rights, legally speaking is immaterial.

If anything, expense reimbursement disputes are more common than wage and hour claims.  This is because California Labor Code section 2802 provides:

  • An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.  

(Italics added.) 

As explained by California’s high Court in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 953 (2008), Section 2802 codifies California’s “strong public policy that favors the indemnification (and defense) of employees by their employers for claims and liabilities resulting from the employees’ acts within the course and scope of their employment … [and] that duty-related losses ultimately fall on the business enterprise, not on the individual employee[.]’”

The “take aways” from the foregoing are:

Radically different legal tests apply to different types of human resource disputes. 

  • If so desired, it is easier for a company to control the outcome of the right of control (expense reimbursement) test, than the ABC (wage order) test with prior legal advice, thought and planning.
  • On the other hand, companies that continue to reflexively reserve (by means of written contracts, employee handbooks, policy manuals or otherwise) the right to control significant aspects of their workers’ activities—and in particular reserve the right to terminate their workers with or without cause—are likely to find, in the eyes of the law, those workers are employees not independent contractors.  
  • This holds true even if a company never exercises its right of control, consistently calls its workers independent contractors, and its workers consent to receive 1099s as opposed to W2s. 
  • In the meantime, right of control notwithstanding, the “old ways” of treating workers as independent contractors to avoid minimum wage and similar requirements established by the IWC are unlikely to withstand scrutiny in the wake of the Supreme Court’s decision in Dynamex.  Employers following those old practices run the (increasingly major) risk of being successfully sued by disgruntled employees.
  • Under the ABC test employees, and the scores of wage and hour attorneys looking to represent them, will now find it much easier to bring class actions, and employers will conversely find it harder to defend against those larger claims.

Author: David A. Robinson, President and Founding Shareholder, Enterprise Counsel Group

1 - California has 18 Wage Orders. 16 relate to specific industries and occupations; one is a general minimum wage order that applies to all California employers and employees (excluding public employees and outside salespersons; one implements the Eight-Hour-Day Restoration and Workplace Flexibility Act of 1999.