Ruling may slow down expanding gig economy

THIS COLUMN APPEARED IN THE 2018 LABOR AND EMPLOYMENT SUPPLEMENT

Putting aside the U.S. Supreme Court's decision in Epic Systems Corp. v. Lewis (2018 DJDAR 4705), perhaps the most important case in employment law this year was the California Supreme Court's unanimous decision Dynamex Operations West, Inc. v. Superior Court (2018 DJDAR 3856). Dynamex throws a major wrench in an employer's decision to classify workers as independent contractors by making employee status much easier to prove. It also makes independent contractor misclassification cases easier to certify on a class-wide basis. As a result, it threatens the growing gig economy in California, leaving technology companies with substantial uncertainty as to how to be in compliance with California law and, at the same time, remain profitable.

Prior to Dynamex, S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989), was the seminal case on employee misclassification, and it established a six-part balancing test to determine if an individual was an independent contractor or an employee. The primary factor in the six-part test was the degree of control that the alleged employer imposed on the alleged employee. Other factors Borello considered were, "opportunity for profit or loss," "investment in equipment or materials," "special skill," "permanence of the working relationship," and "whether the service rendered is an integral part of the alleged employer's business." As one can imagine, given the fact intensive inquiry required to analyze these factors, it was relatively easy for the alleged employer to defeat class certification by pointing to a plethora of individualized issues. This discouraged employees and wage and hour lawyers from bringing independent contractor misclassification on a class-wide basis, and it also meant that the ones that did move forward were difficult, time consuming and expensive to litigate.

Dynamex throws out the balancing test and instead puts the onus on the alleged employer to establish that each element of a three-part test is satisfied. If any one prong of the test is unsatisfied, then the worker is deemed an employee. The "ABC test" is laid out by the court as follows, "Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (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 such 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 for the hiring entity." (Emphasis added.)

This simplification in the balancing test will make class certification significantly easier to achieve. Let's consider Uber as an example. The argument will be put forth that Uber is a technology company that joins riders to drivers, or on the other hand, it is simply a taxi service. If it is the former, Uber may be able to establish that these workers are independent contractors (if they can establish the A and B factors as well), whereas if it's a taxi service Uber would likely fail the C part of the test. Given this dichotomy, all of the workers would be employees or they would be independent contractors. This does away with a situation where some workers are misclassified and others are not. As such, a misclassification class action against Uber would be far easier to certify. The same analysis would apply to a host of gig economy employers.

This presents challenges for companies like Uber that hire people, or provide individuals with opportunities to work. How should these companies approach these people? How should the classify and compensate them? There are no easy answers. Some service providers may find loop holes or creative arguments that allow them to classify their workers as independent contractors. Some more traditional employers, such as trucking companies, may have to reclassify their workforce given the difficulty they will have in establishing the C prong of the test. These more traditional companies will have a hard time, because modifying their internal structure and/o giving greater control to their workers won't change the nature of their businesses.

One potential work around may be the implementation of arbitration agreements that could eliminate the option for workers to participate in or bring class proceedings. The problem is that individual arbitrations could be expensive and the representative Private Attorneys General Act claims will survive due to the California Supreme Court's decision in Iskaninan v. CLS Transportation, 59 Cal. 4th 348 (2014). The penalties for these PAGA claims can range from $5,000 to $25,000 per person employed over a one-year period. For many employers, this will amount to millions of dollars in exposure for misclassification.

The California Legislature and the judiciary have sent a strong signal to the business community that they do not want independent contractor classification being used as a substitute for hiring employees. The independent contractor misclassification costs the state and federal government millions in tax revenues and leaves workers without the possibility of unemployment insurance, worker's compensation benefits, and the protections of the Labor Code. Expect to see more of these cases, not just in the gig economy, but in industries all across California.