Dealing with Dynamex

The California Supreme Court's decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), is having a greater impact on employers than any other decision in recent memory. The high court reversed a long-standing precedent, known as the "Borello test," used to determine whether a worker was properly classified as an independent contractor. See S.G. Borello & Sons v. Director of Dept. of Industrial Relations, 48 Ca.3d 341, (1989). Under Borello, courts applied a multi-factored approach, the key element of which was a measurement of how much control was exercised over the worker. By adopting a new "ABC test," Dynamex instead places the burden on the putative employer to establish that the worker is an independent contractor.

Specifically, applying the ABC test, a worker is an employee unless the hiring entity establishes:

A: that the worker is free from control and direction over performance of the work, both under the contract and in fact;

B: that the work provided is outside the usual course of the business for which the work is performed; and

C: that the worker is customarily engaged in an independently established trade, occupation or business.

According to Dynamex, the hiring entity's failure to prove any one of the above three prerequisites will be sufficient to establish that the worker is an included employee rather than an excluded independent contractor for purposes of the wage order.

Bottom line? Pursuant to Factor B, aka "Killer B," the vast majority of workers classified as independent contractors perform work in the same line of business as the companies that retain them. To be blunt, most workers who are retained as independent contractors will likely flunk the new ABC test.

Many companies rely on independent contractors for a significant portion of their workforce. No question Dynamex dealt a knock-out blow to both small businesses and large companies who had relied on long established California case law in classifying workers as independent contractors. To make matters worse, the Dynamex decision is retroactive and the statute of limitations for most wage and hour violations extends for three years and in some cases four. No one who does business with independent contractors can afford to ignore Dynamex. Unless there are alternative options, companies will need to reclassify independent contractors as employees or potentially face huge penalties and dreaded class actions.

The Joint-Employer Alternative

After Dynamex the question remained as to whether the ABC test applied beyond the independent contractor context. It may well have been answered by the 4th District Court of Appeal in Curry v. Equilon Enterprises, LLC, 23 Cal. App. 5th 289 (2018).

Curry was a gas station manager who alleged she was jointly employed by Equilon doing business as Shell Oil and A.R.S., the company that leased gas stations from Shell. Curry further alleged Shell failed to pay certain compensation and committed unfair business practices. In applying the "suffer or permit to work" standard, the court questioned whether to use the Dynamex ABC test and concluded the policy considerations driving Dynamex to apply the ABC test to the facts in that case did not relate to the type of joint employment relationship in the instant case. The Curry court observed, in the joint-employer context, the alleged employee is already considered an employee of the primary employer. Thus, the policy purpose for presuming the worker to be an employee and requiring the secondary employer to disprove the worker's status as an employee is unnecessary. Curry concluded the Supreme Court in Dynamex did not intend for the ABC test to be applied in joint-employment cases. The court ultimately concluded Shell was not Curry's employer.

Curry should at minimum put joint employers -- such as companies that use leased workers or temporary employees engaged by a third-party temp agency -- at ease with respect to the ABC test, provided at least one of the joint employers treats the worker as an employee for purposes of taxes, payroll and benefits

The Lease for Services Option

The "lease for services" would replace the traditional independent contractor agreement. This distinctive contractual arrangement is intended to allow business owners to avoid having to reclassify their independent contractors. The essential terms of the lease agreement would include but not be limited to the following provisions:

• The lessor is an independent contractor.

• The personnel deployed to the lessee by the lessor are employees of the lessor.

• Non-Exclusive. Lessor would have the right, at lessor's sole discretion, to lease personnel to other lessees.

• Payment of Leased Employees. The lessor would be required and "solely responsible" to pay lessor's employees in compliance with all applicable laws and regulations including paying all tax obligations, incurred as a result of the fees paid by lessee. Lessor shall provide Lessee with proof of timely tax payments.

• Lessor Control of Leased Employees. Lessor would solely determine the means and methods of performance by all leased employees, retain responsibility for and control over: hiring, setting and paying wages; determining hours and working conditions; adjusting grievances and supervising, disciplining, training and terminating personnel necessary for the performance of lessor's obligations.

• Insurance. Lessor would be required to have adequate insurance to cover leased services on a primary basis.

• Return of Property on Termination or Expiration of Lease. Lessor would be required to return lessee's property immediately upon request of lessee or upon termination of the lease, whichever occurs first.

• Personnel Qualifications. Prior to any leased personnel providing service under this lease, lessor would be required provide to Lessee proof that leased personnel are "properly trained and qualified persons" to perform whatever services (defined in the lease) are required by the lessee.

The lease agreement should include an enforceable arbitration provision to serve as an effective methods of limiting liability.

The lease agreement however would likely fall within the California joint-employer liability law (Labor Code Section 2810.3). The lessee could be jointly liable with the independent contractor/lessor if the lessee failed to properly pay its employees who perform services for the lessee. Nevertheless, using a lease agreement reduces the lessee's potential liability. In addition to avoiding Dynamex, the lessee would be deemed a "client employer" and as such, would have less liability than the independent contractor/lessor who would be deemed the "primary employer" under the labor code provisions.

A lease agreement in which the independent contractor employs and pays personnel who provide the lease services to the lessee directly, has the potential of substantially reducing liability for misclassification of workers. But as we have learned in the past year, the courts are not reluctant to overturn long held legal precedents and, as the saying goes, "no one is safe when the Legislature is in session."