On Monday (April 30, 2018), the California Supreme Court issued its much-anticipated decision in Dynamex Operations West, Inc. v. Superior Court, No. S222732. In this very significant decision, the Court altered its decades-old test for determining whether a worker is an employee or an independent contractor. Since the upsurge of independent contractors operating in California, largely resulting from companies like Uber and Lyft (and other “gig economy” workers), seeking to utilize the flexible staffing model, it will be imperative for such companies to now factor in the new standards articulated in the Dynamex case. Particularly since the applicable rules governing classifying workers impose painful consequences including not only liability for unpaid wages and employee benefits, but also statutory penalties for each violation determined to be “willful.”
In its decision, the California Supreme Court characterized the issue on appeal as whether in an employee misclassification case, status should be based upon the expansive definition of “employee” as used in the Wage Orders promulgated by the Industrial Welfare Commission, or whether the common law test for employment set forth in California case law should govern. The proposed class of workers at Dynamex (who work as drivers akin to those at Uber and Lyft and who liken themselves to a new “serf-class”), argued that the existing approach of the law in California governing classification of workers created a horrible plight for unfortunate members of California’s gig economy. Specifically, they claimed to work just as hard as employees while being denied the Labor Code’s basic employee benefits.
The common law test, which is based upon a multi-factor balancing test that depends on the specific and oftentimes unique facts of an employment situation, is more likely to recognize the existence of an independent contracting relationship and that has been the prevailing approach in California jurisprudent for decades. Under the common law approach, the primary consideration in determining if an employment relationship exists is whether or not the employer has the right to control the manner and means of how the work is performed. Secondary factors considered include the degree of skill required to perform the work, the method of payment, and the type of business involved.
The definition of “employment” articulated in the Wage Orders is much broader. Specifically, the IWC Wage Orders define “employee” as “any person employed by an employer.” “Employer” is defined as anyone “who directly or indirectly . . . employs or exercised control over the wages, hours, or working conditions of any person.” The term “employ” means to “engage, suffer, or permit to work.” In making its ruling, the California Supreme Court endorsed the notion that the common law test is an “employer-focused approach” and the Wage Order definitions related to employee status constitute an “employee-centric test gauged to mitigate the potential for employee abuse in the workplace.”
The decision of the California Supreme Court to embrace the Work Order standard for ascertaining employment status was unanimous. And the Court outlined the requirements that a company must show to justify classifying a worker as an independent contractor. Specifically, a company must prove that the worker is free, in everyday tasks, from the company’s “control and direction.” And, the company must also prove that the work is “outside the usual course of the hiring entity’s business.” Finally, the company must demonstrate that the worker is regularly engaged in an independent occupation or business of the same type that he or she is performing for the company. For illustrative purposed, the decision states that a store that hires an outside plumber to come onsite to fix a leak is properly viewed as a contractor. But a clothing manufacturer that hires a seamstress to work at home making dresses that the business will sell has hired the worker to perform work in its usual line of business and is thus obligated by law to pay them as an employee. While the decision did not address other issues such as payment of workers’ expenses, workers’ compensation, and unemployment benefits, which are covered by separate laws, the Court’s rationale will help workers to heretofore have been denied employee status to move closer to achieving that status.
The bottom line is that as a result of the Dynamex decision, many jobs in California that were previously classified unquestionably as independent contractors must now be re-classified as employees. And, going forward, companies striving to succeed in the gig economy (such as Uber or in other sectors of the business economy like construction or agriculture), will now need to assess their potential risk by evaluating their workers’ job descriptions and their contractor agreements in light of the Wage Order-based broad criteria or face serious potential liability and penalties for misclassification of workers.