California High Court Narrows Rule For Classification of Workers as Independent Contractors

CA Employers: Stock Up on Your W-2s; Recycle Your 1099s

In a decision that continues California’s trend toward allowing the designation of a worker as an independent contractor only under rare circumstances, the state’s Supreme Court on Monday held that in determining whether to classify workers as employees or as independent contractors for purposes of California’s wage orders, the state’s “suffer or permit to work” standard requires a hiring entity asserting independent contractor status to establish each of the three factors of the ABC test: i.e., to show that a worker is free from its control, performing work outside the usual course of its business, and customarily engaged in independent work [Dynamex Operations West, Inc. v. Los Angeles County Superior Court, 2018 Cal. LEXIS 3152 (Apr. 30, 2018)]. While the decision has no direct impact in workers’ compensation cases, only a myopic employer can fail to see the writing on the wall. One cannot imagine many circumstances in which a worker that is categorized as an employee under California’s wage order rules would nevertheless be an independent contractor for purposes of workers’ compensation law.

Court Tries to Narrow its Holding

The Court attempted to limit the effect of its ruling, stating that the issue in the case related to the resolution of the employee or independent contractor question “in one specific context” [Opinion, p. 3]. In the underlying lawsuit, two individual delivery drivers, suing on their own behalf and on behalf of a class of allegedly similarly situated drivers, filed a complaint against Dynamex Operations West, Inc. (Dynamex), a nationwide package and document delivery company, alleging that Dynamex had misclassified its delivery drivers as independent contractors rather than employees. The drivers claimed that Dynamex’s alleged misclassification of its drivers as independent contractors led to Dynamex’s violation of the provisions of Industrial Welfare Commission wage order No. 9, the applicable state wage order governing the transportation industry, as well as various sections of the Labor Code, and, as a result, that Dynamex had engaged in unfair and unlawful business practices under Business and Professions Code section 17200.

ABC Test

The Court concluded that in determining whether a worker is properly considered the type of independent contractor to whom the wage order does not apply, it is appropriate to look to a standard, commonly referred to as the “ABC” test. Under this test, used in some other states, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such 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 for the hiring entity.

Broader than Common Law Test

The Court stressed that California’s “suffer or permit to work” definition was intended to be broader and more inclusive than the common law test. For example, with regard to the issue of control, the Court noted that, depending on the nature of the work and overall arrangement between the parties, 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, but does not possess over a genuine independent contractor.