The ABC’s Of Independent Contractor Versus Employee Legal Analysis In California:
How is Workers’ Compensation Affected?
Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County; Charles Lee et al. Case No. S222732
On April 30, 2018, the California Supreme Court authored a comprehensive and extensive eighty two (82) page opinion chronicling the genesis and development of the legal framework for determining whether or not an individual is classified as an independent contractor or employee. (Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County; Charles Lee et al., Case No. S222732, 04/30/18). Following its historical deep dive into the issue, the Court adopted a new and different legal framework called the “ABC Test”. This article will briefly summarize the case, the ABC test, and its relevance to California employers and the workers’ compensation community.
The issue of whether an individual is characterized as an employee or independent contractor has wide ranging consequences for both the individual and the business. This classification can impact a company’s liability for Social Security and payroll taxes, unemployment insurance taxes, workers’ compensation coverage, and its responsibility to adhere to state and federal wage and hour laws and regulations. Given the scope of additional responsibilities/liabilities which rest on an employer-employee relationship, a risk has always existed for the misclassification of an individual as an independent contractor versus an employee.
In the context of workers’ compensation liability, the risk and reward of an erroneous classification is a double edged sword. On the one hand, an “employee” would be entitled to workers’ compensation coverage and benefits at the expense of the employer. While these liabilities may be sidestepped with the classification of “independent contractor”, that status raises the potential for civil liabilities in the event of injury or illness in the workplace. In either case, a misclassification can lead to litigation, such as in in Dynamex, wherein a class of individuals challenged their classification as independent contractors which denied them certain wage and hour protections.
The Court in Dynamex was asked to decide what standard applies, under California law, in determining whether workers should be classified as employees or independent contractors for purposes of California wage orders, which impose obligations relating to the minimum wages, maximum hours, and limited number of very basic working conditions (such as meal and rest breaks) of California employees. Dynamex is a class action lawsuit brought by a group of delivery drivers against Dynamex, a nationwide package and document delivery company, alleging Dynamex had misclassified the delivery drivers as independent contractors rather than employees.
Borello and Workers’Compensation
Defendant Dynamex argued that the multifactor standard set forth in S.G.Borello & Sons, Inc. v. Director of Industrial Relations (1989) 48 Cal.3d 341 (Borello), is the only appropriate standard under California law for distinguishing employees and independent contractors. Borello, a case stemming from a workers’ compensation claim, is viewed as the seminal California case on the independent contractor versus employee issue. Borello addressed whether farmworkers hired by a grower to harvest cucumbers under a written “sharefarmer” agreement were independent contractors, or employees for purposes of the California workers’ compensation statutes. In recognizing the purposes of the Labor Code and workers’ compensation coverage, and noting that a broad interpretation of “employment” met that Act’s goals, the Court in Borello found employee status.
The “multi-factor” or the “economic realities” test was adopted by the California Supreme Court in Borello. In applying the economic realities test, the issue of most significance is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered depending on the issue involved are:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal or alleged employer;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
- Whether the service rendered requires a special skill;
- 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;
- The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job; and
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
The Court in Dynamex discerned from Borello the importance of looking at and understanding the intended scope and purposes of the particular statutory provision. In other words, depending on the underlying statute or regulation in play, the legal test for analyzing the employee versus independent contractor issue may vary. And, in fact, rather than apply Borello, the Court in Dynamex embraced a new, different legal standard in the context of wage/hour regulations: The ABC test.
The ABC Test of Dynamex
The California Supreme Court held in Dynamex that the Borello standard does not apply to employment relationships under California’s Wage Orders. The new test, the ABC test, presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions:
(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 the work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business;
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The burden of proving independent contractor status, as noted, rests with the hiring business. In adopting this new ABC test, the Court embraced a more expansive view of “employee” than was previously seen in the context of Borello.
Employers must prove that independent contractors are properly classified under this new ABC Test as it pertains to California Wage Orders, and possibly other disputes. At this juncture, it is unknown the scope of the “ABC Test” as to claims, other than California wage orders, brought under the Labor Code. It should be noted that Dynamex does not specifically hold that all independent contractors are now employees, and various pre-existing exemptions, such as certain sales or computer activities, would still appear to be valid.
What About California Workers’ Compensation?
With all of the California Supreme Court’s extensive historical discussion, new test issuance and policy proclamations, those in the workers’ compensation world are left to wonder what will be the impact of Dynamex. As a starting point, it should be noted that Borello, a workers’ compensation case, was left undisturbed by the Court in Dynamex.
However, the Court’s expansive view of “employee” status is unmistakable from Dynamex, as is the intent to protect the underlying assumption that those who perform work for others should be classified as workers. These policy drivers will likely come into play in any future Borello-type litigation arising in the context of workers’ compensation coverage. It is expected that workers’ compensation litigation will ensue wherein a party will seek some or all of the “ABC Test” as a guiding force in a decision, and that appellate findings will eventually issue. Thus, it would be prudent for employers (for various wage and hour and other liability reasons) and benefit providers (concerning workers’ compensation coverage) faced with a classification question to consider not only the Borello standards, but also the ABC test, as the need to defend this new test, its applicability and/or scope, are surely on the horizon.