Dynamex Ruling Makes it More Difficult to Classify Employees as Independent Contractors

The California Supreme Court recently issued its long-awaited opinion in Dynamex Operations West v. Superior Court, clarifying the standard for determining whether workers in California should be classified as employees or independent contractors. To ensure conformity with the Court’s ruling we recommend a review of your independent contractor relationships. Given the potentially very high costs of misclassification – multiple violations of California and Federal wage and hour laws with attendant back pay, overtime, penalties, interest and attorney fees – it is prudent to confirm that your agreements are fully compliant.

The Dynamex Court held that individuals are employees unless the entity classifying the individuals can shoulder the burden of establishing that they should, in fact, be independent contractors under the ABC test. To meet the ABC test, each of the following three factors must be established:

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 of the same nature as the work performed.

Factor A which requires that the worker must be free of the control of the hiring entity in the performance of the work can be based on a myriad of related factors evidencing control of the employer over the worker’s performance of work, including whether the worker supplies his own tools or controls the specific details of his work, without interference by the hiring entity.

Factor B mandates that to be considered an independent contractor, a worker must perform work that is outside the usual course of the hiring entity’s business. To illustrate the meaning of the “usual course of business,” the Supreme Court gave the example that “when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having “suffered or permitted” the plumber or electrician to be working as its employee. On the other hand, “when a clothing manufacturing company hires work-at-home seamstresses to make dresses form cloth and patterns supplied by the company that will thereafter be sold by the company,” or “when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes,” the works are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees” and not as independent contractors.

Factor C which requires that workers must be customarily engaged in an independently established trade, occupation or business of the same nature as the work performed, requires a showing that the worker has “independently made the decision to go into business for himself or herself.” Such workers would be expected to have taken “the usual steps to establish and promote his or her independent business,” for example through “incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.”

One final note, the Dynamex ruling only applies to wage orders, which set rules on minimum pay and basic working conditions such as meal and rest breaks. While the decision does not directly apply to other employment claims, such as workers’ compensation claims or tax claims, it seems probable that trial courts and courts, in general, will apply the Dynamex case to other California labor code claims that protect workers’ rights. Indeed, the case will likely trigger more litigation over each of the three factors and what they really mean, as applied to various types of workplaces.

For further information on determining whether workers in California should be classified as employees or independent contractors, or assistance in reviewing your employee agreements for compliance, contact Coblentz Business and Employment partner Steve Lanctot at slanctot@coblentzlaw.com.