This blog post has been superseded by the post on April 30 entitled “Independent Contractor Bombshell for California Businesses”
Tomorrow, April 30, 2018, the California Supreme Court is expected to issue a decision in a case that could change the legal test as to whether an individual is an independent contractor or an employee under California’s wage and hour laws. But, as noted below, the Court is most likely to simply re-affirm the test currently used by the California courts in independent contractor misclassification cases.
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 courts in that state should (a) continue to follow the California Supreme Court’s time-honored holding from 1989 in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations; (b) apply the test set forth in the California Supreme Court’s 2010 holding in Martinez v. Combs; or (c) apply a new standard similar to the employee-friendly test set forth in 2015 by the New Jersey Supreme Court in a case called Hargrove v. Sleepy’s LLC.
What are the three tests under consideration?
The Borello test is a multi-factor standard where no one factor is determinative of the outcome as to whether an employee has been misclassified as an independent contractor.
The Martinez test, in contrast, focuses not on a worker’s status but rather on the converse: whether a business is the employer of the worker.
Hargrove uses a so-called “ABC” test that was formulated by the New Jersey legislature for IC status in unemployment cases but was also applied just over three years ago to wage and hour disputes by the New Jersey Supreme Court to determine IC status. As discussed in our blog post of January 15, 2015, Hargrove is regarded as employee-friendly because, unlike the Borello test, which looks at multiple factors without giving determinative weight to any, the ABC test presumes employee status unless a business is able to establish each and every one of the ABC factors, which are detailed in that blog post. Thus, all three factors are potentially determinative; even if a business establishes two of the three prongs of the ABC test, the worker is still deemed to be an employee.
Why the Court will likely re-affirm Borello as the test for IC status
The Court held oral argument in Dynamex on February 6, 2018. It is difficult for even the most experienced practitioners to predict how a court may rule based on oral argument. But one of the most important exchanges at the oral argument might be the answer to a question posed by one of the justices to the principal lawyer for the truck driver challenging his classification as an IC: under the Borello test, would the driver be an employee or an independent contractor?
The lawyer for the driver responded without any equivocation: his client, a truck driver providing services to Dynamex, a logistics and transportation company, would be an employee under Borello. This response signified that there would be no need for the California Supreme Court in this case to consider changing the test for IC status in California where a new test would not alter the result. Generally, courts are reluctant to alter long-standing legal standards unless the new standard would change the result.
Regardless of whether, in its upcoming opinion, the California Supreme Court refers to this key question and answer at oral argument, this colloquy is likely to tilt the Court in the direction of re-affirming Borello as the test for IC status.
Another reason why the Court is likely to maintain the Borello test was also addressed during oral argument. The lawyer for Dynamex told the Court that each of the factors set forth in the three prongs of the ABC test are already included under Borello. The lawyer further noted that because the absence of any one of the factors would not be determinative under Borello, a court has the flexibility under that test to give whatever weight it deemed appropriate to each of those ABC factors. Retaining such flexibility may well be regarded by the Court as the most important reason to re-affirm Borello as the test for IC status. This is particularly poignant where the Court noted during oral argument that workers in the gig economy do not fall squarely into legal tests for determining IC status.
The argument that Borello already includes all of the ABC prongs may have been a slight overstatement because the second part of the “B” prong of the ABC test takes into account a factor not expressly considered in Borello. Prong B provides that the “service is either outside the usual course of the business for which such service is performed [which is similar to one of the Borello factors], or … is performed outside of all the places of business of the enterprise for which such service is performed [which is not a Borello factor].”
While the California Department of Industrial Relations follows Borello, it does not, however, include the location where the services are performed as one of the eleven IC factors it considers in determining IC status. (See its website page entitled “Independent contractor versus employee.”) That California government regulators do not even consider the place where the services are performed as a factor in determining IC status may be another reason that may prompt the California Supreme Court not to adopt the ABC test in Hargrove.
It is also noteworthy that in the Dynamex case, the driver might well have performed some of his services at a Dynamex place of business, such as one of its warehouses or other facilities where commercial goods would be loaded onto or transferred to a different transportation vehicle. Under the ABC test, the driver would automatically be an employee if any part of his work was performed at any of those corporate locations (assuming that a court would find that the truck driver’s services were not “outside the usual course of [Dynamex’s] business enterprise” as a logistics and transportation company).
A final reason why the Court is not likely to import the Hargrove decision into California when determining IC status is that the ABC test was issued by a legislative body in New Jersey, not by the courts. To date, no court in any state has adopted an ABC test without a statutory or regulatory underpinning.
What does this mean for businesses using ICs in California and other states?
The tests for IC status differ considerably among various federal laws and even more so under a crazy quilt of state laws across the country. Other states that use an ABC test for wage and hour claims include Massachusetts, Illinois, and New Jersey. Thus, a one-size-fits-all approach to IC compliance may not be feasible for many businesses operating across the country or in several states.
Regardless of the ultimate outcome in Dynamex, companies that wish to enhance their compliance with whatever test is ultimately applied in California, or with the current tests in other states and under federal law, 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.” That type of process can lead to a customized and sustainable approach to maximizing IC compliance.
Written by Richard Reibstein