Independent Contractor vs. Employee: Our Supreme Court Speaks Again
On April 30, 2018, the California Supreme Court handed down a ruling that may significantly impact the decision on classifying workers as “employees” or “independent contractors.” To the dismay of many businesses, the decision will place the burden squarely on the hiring entity to establish that its workers are correctly classified as independent contractors. The decision is Dynamex Operations West v. Superior Court.
Dynamex is a package and document delivery company. Prior to 2004, Dynamex treated and paid its drivers as employees. In 2004, Dynamex adopted a new policy and contractual arrangement under which all drivers are considered independent contractors rather than employees. Dynamex maintained that, in light of its contractual arrangement, the drivers were properly classified as independent contractors.
Charles Lee was a delivery driver who signed an independent contractor agreement with Dynamex in January 2005. Four months after signing the agreement, Lee filed a class action lawsuit alleging Dynamex misclassified drivers as independent contractors rather than employees.
Prior to the recent Supreme Court’s Dynamex ruling, and depending on the applicable regulation or statute, California used several tests for determining whether a worker was an independent contractor, particularly the multifactor tests and considerations set forth in Supreme Court decisions re Martinez v. Combs and S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations.
After discussing Martinez and Borello at length, the Dynamex Court decided to adopt a simpler “ABC” test used by courts outside California to determine whether independent contractors are properly classified for purposes of the wage orders adopted by California’s Industrial Welfare Commission. Under this newly adopted test, a worker is considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes:
(A) 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; and
(B) The worker performs work that 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 for the hiring entity.
Notably, the Court also concluded “the suffer or permit to work definition is a term of art that cannot be interpreted literally in a manner that would encompass within the employee category the type of individual workers, like independent plumbers or electricians, who have traditionally been viewed as genuine independent contractors who are working only in their own independent business.”
Employment Defense Tips re Classification
California employers must consider the three Dynamex factors to determine whether they can prove a worker is not an employee. This involves reviewing the reality of the business arrangement apart from any agreement that may attempt to define the nature of the relationship.
If analysis of these factors points towards an employer-employee relationship, and the worker is classified as an independent contractor, the business should consider consulting an experienced employment attorney to evaluate whether it is necessary to re-classify the worker as an employee and take all necessary steps to comply with the applicable wage orders and statutes.