This article was published in Law360.com on May 4, 2018 by Richard Reibstein and Nina Huerta.
© Copyright 2018, Portfolio Media, Inc., publisher of Law360. It is republished here with permission.
When the California Supreme Court issued its groundbreaking decision in the Dynamex case on April 30, announcing a new test to be used in determining independent contractor status under certain California laws, it left open a host of questions that are likely to vex lawyers, businesses and workers. It may take years until the lower courts in the state develop a comprehensive body of law to provide sufficient guidance to stakeholders so that they can conform their actions to the contours of the new court decision.
In Dynamex Operations West v. Superior Court of Los Angeles County, the court created a new test for independent contractor status that is modeled after the so-called “ABC” test used in Massachusetts, which is widely viewed as the toughest test in the country for establishing independent contractor status. In its 82-page decision in Dynamex, the California Supreme Court rejected the exclusive use of the independent contractor test that derived from a 1989 case entitled S.G. Borello & Sons Inc. v. Department of Industrial Relations for claims brought under the Industrial Wage Commission wage orders. That case had established a multifactor test where no one factor was determinative of independent contractor status. Instead, the California Supreme Court endorsed in Dynamex a rigid three-pronged ABC test for the California lower courts to use when determining independent contractor status under various sections of the California Labor Code.
Here’s the court’s articulation of its new test for independent contractor status — all of 115 words:
“The [new] 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; and (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 that involved in the work performed.”
1. Prong A
In Borello, the principal factor in determining if an individual was an employee or independent contractor is whether the business retained or exercised the “right to control” the manner and means of how the individual performs his or her services. In applying Borello, most courts have distinguished between control over “how” the services are performed and “what” services the individual is being paid to perform. Courts have traditionally noted that the “hiring party” retains control over what services are to be performed with both employees and independent contractors, but only employees are subject to control by the “hiring party” as to how the services are to be performed.
In the discussion of prong A, the Dynamex court referred in a favorable manner to Borello, yet also made reference to judicial decisions from Vermont and Washington state. Is prong A’s requirement that the individual be “free from the control and direction of the hirer in connection with the performance of the work” the same as Borello’s “right to control,” similar to it, or different? And if different, in what way?
2. Prongs B and C
Prong B of the ABC test is similar to one of the secondary factors in Borello: whether the work was part of the “hiring party’s” regular business. The court in Dynamex provided two examples — one where the work was not part of the company’s “usual course of … business” and another example where it was: an electrician hired by the retail clothing store to install a new electrical line, and a homeworking seamstress making dresses for a retail clothing store from cloth and patterns supplied by the store. Yet, under even the most employee-friendly test for independent contractor status, the electrician would be an independent contractor, while the homeworker would be an employee under even the most independent contractor-friendly test.
Almost all cases litigated in this area of the law are in the “gray area” — somewhere between the electrician and homeworking seamstress. While the court did not cite to Borello in its discussion of prong B but rather to cases arising under the federal Fair Labor Standards Act and other states (Maine, Vermont, New Hampshire and Connecticut), does that mean that decisions about a company’s “regular business,” decided by the California courts under Borello, have no precedential value under the new ABC test? Or are they also good law when examining the B prong under Dynamex?
In the court’s discussion of prong C, which requires than the business show 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,” it quoted favorably from Borello — but it also cited favorably to prong C cases from Connecticut, North Dakota, Utah, Vermont, Virginia and Massachusetts.
Does the court’s citation to cases arising under these eight states mean that any decisions from those jurisdictions regarding prongs B or C may be relied upon? Can the decisions under prong B from states other than those eight be relied upon as well? Not surprisingly, a nationwide review of cases decided under prongs B and C of a state’s ABC statute reveals that those prongs have been interpreted in vastly different ways from one state to another. Does that mean that lawyers advising their clients about these prongs should canvass the laws in every state with an ABC test?
Another open question is whether Dynamex should be applied prospectively, retroactively or otherwise. Retroactive application would likely invite due process challenges by employers which had long understood Borello as the law. The question of retroactivity depends upon considerations of fairness and public policy.
Public policy considerations may include the purpose to be served by the new rule and the effect on the administration of justice of retroactive application. Considerations of fairness may involve the public’s reliance on the old standards by the parties or others similarly affected, as well as the ability of litigants to foresee the coming change in the law. Given that Borello has long been understood as the applicable test by both businesses and individuals as well as California agencies such as the Division of Labor Standards Enforcement, there are compelling grounds for stakeholders to argue that they reasonably relied upon Borello as good law and that this change in the law was not foreseeable.
Meanwhile, one can rest assured that lawyers representing plaintiffs in pending independent contractor misclassification cases will vigorously assert that Dynamex’s ABC test should apply retroactively. So too will lawyers who file new independent contractor misclassification claims. It would have been very helpful to all stakeholders if the court had addressed this issue of retroactivity. That question may well revert to the California Supreme Court if there are conflicting decisions on this key matter in two or more of the four districts of the California Court of Appeal.
4. Application to Other California Labor Laws
The decision in Dynamex addressed only the test to be applied for determining employee status under wage orders promulgated by the Industrial Welfare Commissioner. Although the plaintiffs in the case also brought claims for expense reimbursement under California Labor Code Section 2802, the court expressly stated in footnote 5 of the opinion that it was not deciding whether the new test would apply to such claims for expense reimbursement because the plaintiffs did not seek appellate review of that aspect of the lower court decision.
Does Borello continue to apply to expense reimbursement claims? Will the lower courts on their own apply the ABC test to such claims? Or will they wait until the California Supreme Court specifically addresses that issue, particularly where Section 2802 has a different legislative/regulatory history than the wage orders?
Similarly, will the new ABC test apply to matters under the jurisdiction of the Employment Development Division or to workers’ compensation matters? Plainly, the Dynamex decision did not address those laws, which have their own legislative history. Will the EDD and the lower courts continue to apply the current tests for independent contractor status for such matters? Will they seek to apply the new Dynamex ABC test or will they wait for the California Supreme Court to decide this matter?
Finally, does the new ABC test apply to any claims brought under the California Private Attorneys General Act?
What Lies Ahead?
While the court stated that its new decision would provide greater clarity and consistency, what is most likely to follow in the wake of the Dynamex decision is a period of great uncertainty accompanied by a flood of class actions.
This new decision not only impacts companies that have a business model using independent contractors, but also impacts workers who have chosen to be their own bosses, are seeking to grow a business, or wish to supplement income from their primary occupation with fees earned from a 1099 gig during evenings and weekends. As revealed in a comprehensive government report on the contingent workforce released in May 2015 by the Government Accountability Office, 85 percent of independent contractors “appeared content with their employment type.” Following the passage of the 2018 tax law, which affords most independent contractors a deduction equal to 20 percent of qualified business income, that number is likely to increase.
Many companies that were or believed they were in compliance with the California wage orders on April 29, 2018, the day before the Dynamex opinion was released, may now be out of compliance with those wage orders.
While many commentators have characterized California as a state where independent contractor relationships can no longer exist, many businesses can establish or maintain such relationships even after Dynamex. Instead of reclassifying, such companies can restructure and re-document their independent contractor relationships, using a process such as IC Diagnostics.™ While the legal landscape has certainly changed following Dynamex, many businesses and individuals that wish to enter into or maintain a sustainable independent contractor relationship can still do so.