Storms on the horizon after high court’s Dynamex ruling

In early 2018, the California Supreme Court drastically changed the test for whether workers should be classified as employees or independent contractors, overturning nearly 30 years of precedent. In Dynamex Operations West, Inc. v. Superior Court of Los Angeles, the court changed the way California businesses approach the use of independent contractors as part of their workforce, and made it more difficult for workers to maintain an independent contractor relationship with California businesses.

Entering Choppy Waters: What Did Dynamex Change?

The test for whether a worker is properly classified as an independent contractor is no longer focused on a multitude of factors, the primary one being the level of control the business exercised over the worker.

Instead, Dyanmex replaced the prior independent contractor test with a three-factor test, known as the "ABC" test, which presumes all workers are employees unless the company demonstrates that all three of the ABC factors are met:

(A) the worker is free from the control and direction of the presumptive employer in connection with the performance of the work;

(B) the worker performs work that is outside the usual course of the presumptive employer's business in order to be classified as an independent contractor; and

(C) the worker is customarily engaged in an independent established trade, occupation or business of the same nature as the work performed for the presumptive employer's business.

In order to be classified as an independent contractor, the most consequential factor of the ABC test is the second prong of the test, which requires that the worker perform work that is outside the usual course of the employer's business. This is especially problematic for companies who heavily rely on outside labor contractors, such as those in entertainment, technology, freelance, design, personal services, emerging markets (including the on-demand "gig" economy) and businesses who generally rely on contractors for finite, task-based projects to supplement their standard workforce.

California businesses have relied on 30 years of precedent in growing and developing their businesses through the use of independent contractors. With one decision, Dynamex has forced many of these companies to reevaluate their business models. The change has also affected workers who preferred and came to rely on the freedom provided by the independent contractor relationship.

The Waters Get Choppier

In issuing its decision in Dynamex, the California Supreme Court did not weigh in on whether the new test should apply retroactively. But in May, the 9th U.S. Circuit Court of Appeals, in Vazquez v. Jan-Pro Franchising International, Inc., affirmatively held that Dynamex applied retroactively under California law. (An earlier California appellate court decision from October 2018, Garcia v. Boarder Transportation Group, LLC, applied Dynamex retroactively because defendants, who carry the burden of proof for arguing non-retroactivity, assumed retroactivity). In doing so, the 9th Circuit noted that the California Supreme Court denied later requests to modify Dynamex to apply the ABC test only prospectively, effectively implying retroactive application, and explained that California has a general tradition of applying judicial decisions retroactivity.

Employers in California should therefore review the potential implications of this retroactive applicability of Dynamex.

Interestingly, Vazquez also expanded on the second prong of the "ABC test," noting that courts applying the test have framed that inquiry in several ways. This includes considering: (1) whether the work performed by the contractor is necessary or merely incidental to that of the hiring entity; (2) whether the work is continuously performed for the hiring entity; and (3) what the business is that the hiring entity proclaims to be in (i.e., what the business advertises itself as). Following Vasquez, businesses may want to consider these factors when analyzing whether a worker performs work that is outside the usual course of the employer's business under prong B.

The very next day following the Vazquez decision, the California Division of Labor Standards Enforcement, the administrative agency authorized to enforce California wage and hour laws, issued an opinion letter that concluded that Dynamex is not simply limited in application to the IWC Wage Orders, but also that the ABC test applies to California Labor Code provisions, including Sections 226 (itemized wage statements), 226.7 (meal and rest periods), 510 (overtime), 512 (meal and rest periods), 1182.12 (minimum wage), 1194 (overtime), 1194.2 (liquidated damages), 1197 (minimum wage) and 2802 (reimbursement of expenses). The DLSE reasoned: "Wage order obligations are also imposed by certain Labor Code provision[s], which serve to enforce wage orders [and i]n such cases, the IWC employer definitions are imported into the Labor Code provision."

The DLSE acknowledged, however, that California appellate courts differed on whether the ABC test applies to Labor Code section 203 (penalties for failure to pay wages due at termination), but stated that "where section 203 serves to enforce the underlying minimum wage and overtime obligations of the wage order, application of the ABC test to these claims would be appropriate." Although DLSE opinions do not have precedential value, its opinions may reflect what is to come (and what may already be here) with respect to enforcement of those Labor Code provisions.

Storms on the Horizon

Dynamex does not apply to the question of worker classification under federal law. In fact, at the federal level, the trend has been to recognize "gig" economy workers as true independent contractors. On April 29, the U.S. Department of Labor issued an Opinion Letter concluding that workers who operate in the gig economy could be properly classified as independent contractors under the Fair Labor Standards Act, at least on the facts provided by the virtual marketplace company that solicited the letter. Notably, this has little impact on businesses that operate in states like California, where employers must nevertheless abide by much stricter state wage and hour laws.

The trend toward greater recognition of gig economy workers as contractors has continued in the unionization context. On May 14, the National Labor Relations Board released an Advice Memorandum opining that Uber drivers are independent contractors -- not employees -- and are therefore ineligible to unionize. The NLRB utilized a multi-factor, common-law agency test and noted that, while there was no shorthand formula for determining an independent contractor or employment relationship, the "important animating principle" by which to evaluate the various factors is whether the position afforded the worker with "significant entrepreneurial opportunity."

On the other hand, the California Legislature has been working to codify Dynamex through a bill strongly backed by organized labor. At present, Dynamex does not apply to the workers' compensation context and does not, by its terms, apply beyond the wage orders. The proposed bill, known as AB5, recently passed the state Assembly and looks to expand Dynamex to all provisions of the Labor Code and the Unemployment Insurance Code. The proposed bill exempts certain professions and industries, as well as small businesses, from its provisions, and could be further revised. It would need to be approved by the state Senate and Gov. Gavin Newsom before becoming law. 