New Employment Ruling Clamps Down on Employer Flexibility

Independent Contractor or Employee?

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This time, it all began with Dynamex Operations, an Uber-like delivery service where the drivers—independent contractors—had to wear company uniforms and sport the company’s logo, all while providing their own cars and trucks for deliveries. Understandably, they wanted employee status with all of the labor protections and benefits such status entails (unemployment insurance, healthcare, paid parental leave, overtime pay, vacation time, workers’ compensation, and a guaranteed minimum wage). Dynamex, in turn, saw its business model being destroyed if the added costs of employee benefits and taxes were thrown into the mix. So, as class-action representatives, two of the employees sued the company.

As in many other States, determining whether a California worker is an independent contractor or an employee has always been difficult. And with our new “Gig” economy (i.e., temporary, flexible jobs such as driving for Dynamex) in place, companies are increasingly structuring themselves so as to be able to hire independent contractors and freelancers in place of regular employees. The Gig economy, then, complicates the question even more.

Many judges find the standards vague, so it’s not hard to imagine the uncertainty that employers, unschooled in such legal nuances, face. After all, when exactly will an independent contractor cross the line from that status to one of becoming an employee?

Even the best-intentioned of employers may not recognize when that line has been crossed. And, yet, the price to pay if one guesses wrongly can be staggering, certainly in California. The laws there have been weighted so heavily in favor of employees that if the employer loses on a wage-hour claim made by an “employee,” then the employer has to pay all of the employee’s legal fees. So, let’s say the employee wins $1.00, the employer must then pay the entirety of the employee’s attorneys’ fees, which could easily total $300,000. On the other hand, if the employee loses completely, then he or she doesn’t have to pay the employer’s legal fees. Not one penny. Needless to say, many of these cases settle with the employees getting pretty much all that they are asking for.

With the law such a muddle, employers, employees, and independent contractors needed clearer guidelines to follow when asking the employee-versus-independent-contractor question. It was just that employers were really hoping that independent-contractor status would be favored by such guidelines.

Dynamex Breaks New Ground
It took 10 years for the lawsuit filed by the Dynamex employees to wend its way to the California Supreme Court and ultimately a decision. But on the last day of April 2018, the Court issued its decision in favor of the Dynamex workers. The drivers, it said, were employees. (Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018))

Keep in mind that the Court focused only on “wage orders” and not any other aspect of the worker-company relationship (such as workers’ compensation benefits or right to paid parental leave and other guaranteed benefits). In California, the Industrial Welfare Commission (IWC) is charged with setting overtime wages, hours and working conditions for workers and issues “wage orders” that are quasi-legislative regulations. (Labor Code §§ 1173, 1182, 1182.11, 1182.12, and 1182.13)

Specifically, the California Supreme Court had asked itself the question whether workers should “be classified as employees or as independent contractors for purposes of California wage orders, which impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees.”

Burden of Proof on Employers
In unanimously ruling against Dynamex Operations, the Court broke with the old multifactorial standard (per S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989)) and adopted a new standard that presumes that all workers are employees instead of contractors. The burden of proof rests on any company claiming an individual as an independent contractor.

Applying its newly adopted “ABC” test, the Court stated that any employer wanting to engage a worker as an independent contractor (for whom a wage order would not apply) must establish all of the following: (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. This is now the test for determining whether a worker is an employee or an independent contractor and it follows a rule used in many other States such as New Jersey, Vermont, and Massachusetts.

For example, in a 2015 case, the New Jersey Supreme Court had concluded that “any employment status dispute arising under [either the New Jersey wage payment law or the New Jersey wage and hour law] should be resolved by utilizing the `ABC’ test ….” (Hargrove v. Sleepy’s, LLC, 220 N.J. 289 (2015)) The California Supreme Court favorably quoted the New Jersey Supreme Court in its Dynamex decision, “permitting an employee to know when, how, and how much he will be paid requires a test designed to yield a more predictable result than a totality-of-the-circumstances analysis that is by its nature case specific.”

The Dynamex Court also favorably quoted the Federal Court (U.S. Dept of Labor v. Lauritzen, 835 F.2d 1529, 1539 (7th Cir. 1987)) in a way that could be more universally applicable to legal misfortunes: “People are entitled to know the legal rules before they act, and only the most compelling reason should lead a court to announce an approach under which no one can know where he stands until litigation has been completed….” This is my favorite quote in the entire case.

Post-Dynamex
Only a little over a year has passed since the Dynamex case was decided and it has already been put to the test. In late October 2018, a California court of appeal ruled on employee status in the case of Jesus Cuitlahuac Garcia v. Border Transportation Group, LLC, et al. (28 Cal.App.5th 558), where a taxi driver had brought a wage-and-hour lawsuit against the company for whom he worked, the Border Transportation Group. The Fourth Appellate Court held that the Dynamex “ABC” test only applies to wage-order claims. Yet, this court also made clear that employers definitely bear a heavier burden to overcome the legal presumption that all workers are employees.

Spurred on by the Dynamex decision, the California State Assembly in March 2019 passed a bill, AB5, which would codify the “ABC” test as Section 2750.3 to the Labor Code. Exemptions for professionals have been inserted into the bill. It has been referred to the State Senate Labor, Public Employment and Retirement Committee, where it is currently under consideration. The bill will most likely pass and then be signed into law by California Governor Gavin Newsom.

What Does This Mean for Employers?
The court ruling means that it is now much tougher for an employer to claim that one of its workers is an independent contractor. If the worker fails to meet even one of the three conditions of the “ABC” test, then the worker has to be classified as an employee. This is a much clearer, but stricter, standard of proof than under murkier Federal guidelines.

And while the Dynamex decision benefits many deserving workers who are truly poorly “positioned,” shall we say, with their employers, the change in the law also has some ominous undercurrents. It is clearly in the interest of the government to convert as many independent workers into “wage slaves” with reportable, trackable income and less independence. It will also drive many businesses out of the State.

And what effect will this decision eventually have on franchisor-franchisee relationships? On MLM downlines? On any number of carefully crafted business models that depend upon traditional independent contractors? That, as they say, remains to be seen. But, tongue in cheek, we could say that the California State legislature and its courts may have done for the California economy what panty hose has done for foreplay. Made things much tougher.

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