The California Supreme Court will hear oral argument tomorrow in a case that has the potential for altering the long-standing test in California for independent contractor status. The case is Dynamex Operations West v. Superior Court (No. S222732), which has been on appeal before the California Supreme Court since January 2015. The issue in Dynamex is whether, in wage and hour cases in California, the Supreme Court should continue to follow its time-honored holding from 1989 in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations (which is roughly akin to a common law / economic realities test for determining IC status) or apply a far more rigorous standard as set forth in the 2010 holding in Martinez v. Combs.
In connection with the oral argument, the California Supreme Court asked the parties to file supplemental briefs addressing whether the test for IC status in California should embody the standard set forth in 2015 by the New Jersey Supreme Court in a case called Hargrove v. Sleepy’s LLC. As we discussed in a blog post on January 15, 2015, the Hargrove decision held that, henceforth, when determining IC status in wage and hour cases, the courts in New Jersey would borrow the so-called “ABC” test formulated by the New Jersey legislature for IC status in unemployment cases. That decision is regarded as employee-friendly because, unlike most other IC tests including Borello, which consider and weigh a number of different factors when determining IC status, an ABC statute requires that each and every one of the three prongs of the ABC test be proven by a business to establish IC status.
What is the ABC Test?
The ABC test is the statutory definition of “employee” under the New Jersey Unemployment Compensation Act. It is the same test used by over 20 other states for determining eligibility for unemployment benefits. It presumes an individual is an “employee” unless the employer can show that:
(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and
(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.
The New Jersey Supreme Court in Hargrove noted that “[T]he failure to satisfy any one of the three criteria results in an ‘employment’ classification.”
Analysis of the Arguments Made by the Parties in Their Supplemental Briefs
The worker whose status is in dispute in the Dynamex case is a delivery truck driver. His lawyers’ supplemental brief states that the Court should adopt the Hargrove test because the remedial, worker-protective purposes of the wage and hour laws in California mirror those in New Jersey. Of particular interest in the worker’s brief is the lawyers’ statement that “the second consideration in Part B of the ABC test (work performed outside all the places of business of the hirer) would be of limited value as a consideration, however, because in today’s modern economy, many people work remotely such that their services are typically performed outside of the principal’s places of business.”
But that analysis does not consider the impact of Prong B on those workers who, like the truck driver who began this case as well as a huge number of individuals classified as ICs, perform some or all of their services at one or more places where the company conducts business. Taking the worker’s brief to its logical conclusion would lead to the anomalous result that many workers would be classified as ICs or employees depending simply on whether or not they work from their home office and/or any other “remote” location.
The supplemental brief of the company focuses on the fact that the ABC test is a statutory test issued by a legislative body, and no court has adopted that test without such a “statutory or regulatory underpinning.” The company also notes that each of the three prongs of the ABC test are already considered in the Borello test for IC status.
This last point may be the most important one raised in the parties’ supplemental briefs. The California Department of Industrial Relations states on its website page entitled “Independent contractor versus employee” that, under Borello, the determination of a worker’s status “depends upon a number of factors, all of which must be considered, and none of which is controlling by itself.” The website page states that the California Division of Labor Standards Enforcement considers all factors bearing on “whether the person to whom service is rendered…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.” The website page then lists 11 specific factors “that may be considered.” Notably, although court cases in California have made note of the location where the services are performed, none of the 11 factors listed on the webpage addresses the location where the services are performed, which is the second part of the B prong in the ABC test. At least in the minds of the government regulators, the location where the services are performed does not appear to be of particular significance.
Abandoning Borello in favor of an ABC test would eliminate the flexibility built into the current test for IC status. If for example, a business could establish all 11 of the IC factors listed on the Department of Industrial Relations website, but the worker performed a part of his or her services at a place of business of the company for which the services are provided, then the worker would automatically be deemed an employee.
One final observation: When the New Jersey Supreme Court held in Hargrove that the test for IC status in wage and hour cases would now be the ABC test, it did not change the law; rather, that Court had not previously issued a definitive ruling on IC status in that context. In contrast, Borello was decided by the California Supreme Court close to 30 years ago. Since issued, many businesses and individuals in California have sought to construct their IC relationships in compliance with the teachings of Borello. Indeed, when any new business in California wished to create a business model utilizing ICs and desired to structure and document their IC relationship in a lawful manner, they would likely have searched for the webpage described above and sought to follow the guidelines listed online by the California Department of Industrial Relations. To change the test for IC status would not only result in confusion, but also could be extremely costly and prejudicial to those companies and individuals who have sought to comply with the law as articulated by the courts and the Department of Industrial Relations if they otherwise are unable to meet any of the three prongs of an ABC test.
The laws applicable to ICs have been in flux for the last ten years, and the tests for IC status differ considerably among various federal laws and even more so under a crazy quilt of state laws. The California Supreme Court may opt for consistency, or it may see fit to change the law.
While oral arguments can be informative to the parties and interested members of the general public in terms of what the reviewing court may decide, few lawyers can predict with any degree of certainty how an appellate court will rule.
Regardless of the ultimate outcome in Dynamex, companies that wish to enhance their compliance with whatever test is used in California, or with the current tests in other states, should consider using a process that maximizes their IC compliance. One such process is IC Diagnostics,™ as discussed in the latest White Paper on “How Companies Can Minimize the Risk of IC Misclassification Liability.”
Written by Richard Reibstein