Ten months ago the California Supreme Court rendered its unanimous decision in Dynamex Operations West, Inc. v. Superior Court, a case that articulated a new standard for classifying employees and independent contractors. Given the importance of this decision, we provided analysis on this case when it was first decided. However, once issued, this new Dynamex standard did not settle the issue of employee classification in California once and for all. Rather, as we anticipated in our prior post, Dynamex has cast a long shadow, and the issues it raised have continued to gestate, giving rise to renewed focus on employee classification at the state (and federal) level.
Determining whether a service provider is an independent contractor or an employee can be tricky for businesses. This is because there are a number of tests for determining employee status. For example, the Internal Revenue Service generally looks at the level of behavioral control and financial control that a business has over a service provider, as well as additional factors indicative of an employer-employee relationship. If a service provider is deemed to be an employee under this test, the employer will be subject to federal wage withholding and reporting obligations under the Internal Revenue Code. Otherwise, these obligations generally will not apply.
Meanwhile, prior to Dynamex, California law imposed a ten-factor Borello test for determining employment status, which considered factors such as whether a business has the right to control the work provided by the service provider, as well as whether the business has the right to discharge that service provider at will, without cause. If an employee is deemed to be an employee under California law, a number of obligations may apply, including the obligation to provide hourly wages that comply with California’s minimum wage requirements.
The Dynamex Decision
As we discussed previously, the Dynamex court was tasked with determining the proper classification of individuals engaged as delivery drivers in connection with California wage orders. Although Borello already provided a ten point facts and circumstances test for determining employee classification, the court chose to reject this approach. Instead, to “provide greater clarity and consistency, and less opportunity for manipulation” the court applied the following ABC test to analyze whether an individual is an independent contractor:
“(1) 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 such work and in fact;
(2) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(3) that 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.”
The burden is placed on the hiring entity to establish all three factors, and only then may the service provider be classified as an independent contractor. Otherwise, if any of these factors are not met, the worker will be included as an employee and not an independent contractor.
A number of developments have occurred since the California Supreme Court issued the Dynamex decision. First, California’s Court of Appeals, Fourth District, clarified in Garcia v. Border Transportation Group that the ABC test only applies to wage orders, and does not apply “categorically to every working relationship.” Meaning that the Borello standard continues to be applied to non-wage disputes, such as wrongful-termination claims and certain overtime rules. This further complicates employee classification for businesses, since they must now apply two different tests for determining employee status under California law—the ABC test articulated in Dynamex for wage orders and the ten factor Borello test for all other purposes.
Competing bills have been introduced into the California legislature’s current session in response to Dynamex. Assembly Bill No. 71, which was introduced by Assembly Member Melissa Melendez, proposes to roll-back the ABC test and replace it with the facts and circumstances standard articulated in Borello. Meanwhile, Assembly Member Lorena Gonzalez introduced a competing bill, Assembly Bill No. 5, with the intent of “codify[ing] the decision in the Dynamex case and clarify[ing] its application.” In its current form Gonzalez’s bill would only codify Dynamex with respect to wage orders, and therefore under Garcia the ten-factor Borello test would still govern non-wage disputes. As of the writing of this blog post, no action has been taken on either bill. In addition to these legislative proposals, it remains unknown what actions, if any, California’s newly elected governor, Gavin Newsom, will take with respect to employee classification.
Dynamex’s reach is not limited to California, however. In the last congress, Senator Benie Sanders (D. Vt.) proposed the Workplace Democracy Act, which he introduced on May 9, 2018, mere days after the California Supreme Court’s unanimous decision in Dynamex. In this bill, Sanders and his co-sponsors (Senators Gillibrand, Warren, Baldwin, Whitehouse, Harris, Merkley, Markey, Booker, Wyden, Leahy, and Van Hollen) propose to incorporate the ABC test into the National Labor Relations Act. Although that legislation did not pass in either chamber of the republican-controlled 115th Congress, it is possible that Sanders will reintroduce it in a subsequent session – Sanders has introduced the legislation a number of times since 1992, including in the 114th Congress, but this most recent iteration is the first to propose applying the ABC test to the National Labor Relations Act.