The New “ABCs” of Employee Classification in California: Dynamex Operations West Inc. v. The Superior Court of Los Angeles County
A recent California Supreme Court case is expected to have a significant impact on the “gig” economy on the issue of how to classify workers. In Dynamex Operations West Inc. v. The Superior Court of Los Angeles County, the highest court in California affirmed the trial court’s decision to certify a class action but also changed the framework for analyzing how workers in the “gig” economy should be viewed.
The case arose when delivery drivers working for Dynamex, a delivery company, sued the business for classifying the drivers as independent contractors. Dynamex Operations W., Inc. v. Superior Court, 4 Cal. 5th 903, 914 (2018). The drivers filed a class action asserting that because they were misclassified, Dynamex violated both California state laws and federal laws thereby engaging in “unfair and unlawful business practices.” Id. After an initial denial of class certification was overturned by the appellate court, the trial court certified the class by relying on precedent from the California case Martinez v. Combs. Id; see also Martinez v. Combs, 49 Cal. 4th 35 (2010). Martinez held that “to employ” under the California wage order (the same regulation at issue in Dynamex) was defined in three ways: 1) to exert control over wages, hours and conditions of employees; 2) to “suffer or permit to work;” and 3) to “engage, thereby creating a common law employment relationship.” Martinez at 64; see also Dynamex at 914.
After the trial court certified the class and denied Dynamex’s motion to decertify, the company filed a writ of appeal. Dynamex, 914. The court of appeal affirmed the certification and Dynamex appealed to supreme court of California. Id.
Dynamex’s Argument – Borello
Dynamex argued that the trial court erred in using the Martinez standard because it applied only to joint-employer situations. Id at 925. For the wage and hour positions, the court should instead use the Borello factor-test, which determined if a worker was an employee or independent contractor by analyzing the relationship through a variety of factors. Id at 925-7. Moreover, the Borello court stressed the importance of analyzing the relationship against the backdrop of the purpose of the statute at issue. Id at 930.
Dynamex further stressed that interpreting the California wage order regulation literally, “to suffer or permit to work” would allow truly independent contractors to be considered employees. Id at 947. This confusion regarding worker classification, Dynamex asserted, should be resolved by applying the Borello test. Id at 947-8.
Drivers’ Argument — Martinez
The drivers asserted that Martinez should be the standard to analyze worker classification in California. Martinez sets forth the three alternatives to determining whether a worker is an employee: 1) to exercise control over the wages, hours or working conditions, or (2) to suffer or permit to work, or (3) to engage, thereby creating a common law employment relationship.” Id at 939; see also Martinez at 64.
The ABC Test
The California Supreme Court decided to make its own test to help interpret the vague standard of “suffer or permit to work” by creating the “ABC test.” Dynamex at 964. The test essentially presumes that a worker is an employee unless the employer shows: A) the worker is free from control of the employer in both the contract and the actual work; B) the work performed is outside the usual scope of the employer; and C) the worker is “customarily engaged” in independent work. Id. Of note, the burden is on the employer to prove all three elements, and if it fails to prove any one of them, the worker is deemed an employee. Id.
The court stated that its rationale for creating this new test arose from a desire to protect workers in the emerging “gig” economy. Id at 960. By allowing some companies to bypass the wage order and classify workers who perform the duties of an employee under the label of independent contractor, other companies stop hiring workers who wish to work as employees in lieu of the new “independent contractors.” Id.
Using the ABC test, the court found that Dynamex could not meet all elements. Id at 965. The court started with the second (or B) factor and found that the drivers’ work of delivering items was not outside the usual scope of Dynamex, whose principal business is delivery of items and letters. Id. The court noted it could have stopped the analysis here, since all elements must be met for Dynamex to establish that the workers were independent contractors but choose to proceed to provide future guidance. Id at 966. On the C factor, since the class that was certified consisted of drivers who solely worked for Dynamex, they could not be said to “customarily engag[e]” in independent work. Id. Ultimately the court held that the class certification was proper and affirmed. Id at 967.
Consequences of the ABC Test
The Dynamex decision looks not only to expand protections for workers in the “gig economy” but also will likely result in future lawsuits concerning misclassification of employees. One avenue for this type of litigation, as noted by Sharon Rossi and Gayle Athanacio, is through the Private Attorney General Act (PAGA). Sharon Rossi and Gayle Athanacaio, New “ABC” Test for Independent Contractors Changes the Landscape for Workers in California. PAGA suits can bypass class action waivers and arbitration agreements, making them a powerful tool for workers to bring misclassification claims. Id.
Although the decision was limited to the California wage order regulation, it is uncertain whether the ABC test will affect other industries and in what way. At a minimum, California employers are likely to be carefully re-examining the status of their workers in light of Dynamex.
(Nick Leyh, a third-year student at the University of Missouri School of Law prepared this post.)