This week, California labor relations were rocked again … this time by a seismic change in how California courts will decide who is an employee and who is an independent contractor.  The distinction is crucial since, among other things, employees are protected by a vast number of laws and wage protection benefits whereas, generally speaking, independent contractors are not.

Until now, California courts have been under marching orders to examine “the purposes and intended reach of [each separate employment] statute [together with] all of the various factors set forth in prior California cases; in Labor Code section 2750.5 and in the out-of-state cases adopting [a so-called] six-factor test.”  (Dynamex Operations West, Inc. v. Superior Court, (2018) S222732, *30)  In other words, they were told by the California Supreme Court to apply a complex “multifactor standard” requiring “consideration of all potentially relevant factual distinctions in different employment arrangements on a case-by-case and totality-of-the-circumstances basis.” (Dynamex, *62)  This so-called “wide-ranging and flexible test” had “significant disadvantages, particularly when applied in the wage and hour context.”  (Ibid.)  It made it hard for hiring businesses to know how a particular category of workers would be classified, often leading to expensive, time-consuming litigation and, for some ruinous multi-million dollar damage awards.

On the other hand, according to some commentators, the complexity made it easier for employers to evade their “fundamental responsibilities” under a wage and hour law by dividing their work forces into disparate categories and varying the working conditions of individual workers within those categories as a means of avoiding the cost of having employees.  (Dynamex, *63)

As a result of the California Supreme Court’s newly released decision in Dynamex, however, this is no longer the case, at least for purposes of determining worker benefits under California wage orders.  Now, applying a legal test pioneered in other states, “unless the hiring entity establishes (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, the worker should be considered an employee … [Put another way,] the hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of [a] wage order.”  (Dynamex, *77)

This new so-called “ABC” test will have far ranging implications for California businesses and consumers.  For example, drivers for Uber Technologies, Inc. and Lyft, Inc. will now almost certainly be classified as employees (the California Labor Commission previously so ruled, but that administrative ruling is currently on appeal), putting California at odds with judicial rulings on the same issue elsewhere.  For example, less than a month ago a U.S. District Court judge in Philadelphia ruled limousine drivers for Uber are independent contractors under federal law.  Two months earlier, a federal judge in San Francisco said food delivery workers for Grubhub, Inc. are not employees. Similarly, last year a state appeals court in Florida said Uber’s drivers are not its employees under Florida law. 

Arguably, the adoption of a rule making such “gig economy” workers employees will not only transform the economics of a popular alternative means of transportation in California, but will unleash a new round of “wage and hour” class action lawsuits.  Indeed, as demonstrated in Dynamex, it will now be easier to overcome the procedural hurdles to bring such class actions.

It is unclear whether the “ABC” test will be applied across-the-board to distinguish between employees and independent contractors in other contexts.  The Supreme Court declined to so state.  Two things are clear, however:  (1) It will now be considerably more difficult for businesses to classify workers as independent contractors for wage and benefit purposes, and (2) all businesses with independent contractors should immediately find out whether they meet the ABC test.  If they do not, they should immediately consult counsel.

Author: David A. Robinson, Esq., Enterprise Counsel Group, ALC, President and Founding Partner