November 23, 2018 Feature

Independent Contractors Might Actually Be Employees

By Kelso L. Anderson

 

Workers who have customarily been viewed as independent contractors may be employees under wage orders, entitled to certain minimum wages, benefits, and basic work conditions reserved for employees, according to the California Supreme Court. Holding that the onus is on an employer to disprove that a worker is an employee and not an independent contractor, the court stressed that its ruling provides predictability in a long uncertain area of law. While ABA Section of Litigation leaders agree that the decision provides rudder, they also think it will prompt businesses in the “gig economy” to redefine how they classify workers in the “usual course of [their] business.”

Commonality of Claims Predominates, Making Class Certification Proper

In Dynamex Operations West, Inc. v. Lee, et al., the court considered whether, for purposes of California wage orders, workers should be classified as employees or independent contractors. Two delivery drivers filed a class action complaint against their former employer, Dynamex Operations West, Inc., a nationwide package and delivery company. The class included persons who, in 2005, did delivery work exclusively on the defendant’s behalf. Prior to 2004, the defendant classified all of its California drivers as employees and compensated them according to the state’s wage and hour laws. In 2004, however, the defendant adopted a policy and contractual agreement with all of its drivers that reclassified them as independent contractors instead of employees.

In certifying the class, the trial court found that common legal and factual questions predominated over the proper classification of the drivers as employees or independent contractors under the applicable transportation wage order. The trial court also relied on three alternative definitions of “employ” and “employer” set forth in the wage order, and as explicated in the California Supreme Court’s ruling in Martinez v. Combs. Martinez set forth a disjunctive test as to the meaning of “to employ” under California wage orders, defining the term as meaning to “exercise control over the wages, hours, or working conditions” of a worker; to “suffer or permit to work”; or to “engage, thereby creating a common law employment relationship.”

The defendant filed a writ of mandate to the intermediate appellate court, the California Court of Appeal, challenging the trial court’s denial of its motion to decertify the class. The defendant argued that Martinez’s disjunctive definition of “to employ” applied only in a joint employer context, and, therefore, the trial court erred in finding that definition applicable in the defendant’s single employer context. Concluding that the Martinez test applies in the single employer context, the appellate court also rejected the defendant’s contention that the multifactor standard in S.G. Borello & Sons, Inc. v. Department of Industrial Relations was the only correct standard for distinguishing employees from independent contractors. Similar to Martinez, Borello set forth a disjunctive standard that courts weigh to determine whether a worker is an employee or independent contractor. Because the wage order definitions of “employer” and “to employ” discussed in Martinez were relevant to determining whether a worker is an employee or independent contractor, the appellate court affirmed the trial court’s certification order.

In affirming the Court of Appeal’s reading of the “suffer or permit to work” definition of “to employ” discussed in Martinez, the California Supreme Court observed that the former term should not be interpreted literally to encompass workers “who have traditionally been viewed as genuine independent contractors.” Genuine independent contractors include persons who are “customarily engaged in an independently established business,” including plumbers and electricians, the court observed. Further, the court explained that the “suffer or permit to work” standard refers to, as written, an employer that “has ‘suffered or permitted’ the worker to work in its business.” Definitions aside, according to one Section of Litigation leader, the Dynamex court clearly thought the lower courts appropriately certified a class.

The ease with which the court affirmed class certification underscores the significance of the Dynamex decision.

— Robert J. Herrington, Los Angeles, CA

Cochair, Emerging Issues Subcommittee, Class Actions & Derivative Suits Committee

“The ease with which the court affirmed class certification underscores the significance of the Dynamex decision,” concludes Robert J. Herrington, Los Angeles, CA, cochair of the Emerging Issues Subcommittee of the Section of Litigation’s Class Actions & Derivative Suits Committee. “The court spent just four paragraphs on the class certification issue, and although the court found that the trial court’s view of the ‘suffer or permit work’ standard was too broad, the court still concluded” that class certification was proper, Herrington observes. Indeed, the court quoted dicta to support its affirmation of class certification, noting “when plaintiffs in a class action rely on multiple legal theories, a trial court’s certification of a class is not an abuse of discretion if certification is proper under any of the theories.”

Evolution of the Common-Law “Control of the Details” Standard

The Dynamex court also explained the rationale animating the existing standards used to determine whether a worker is an employee or independent contractor. Citing dictum in NLRB v. Hearst Publications, a U.S. Supreme Court precedent, the Dynamex court traced the difficulty in distinguishing employees from independent contractors to the common law. At common law, the problem of classifying a worker as an employee or independent contractor arose in the tort context, to determine whether an employer would be vicariously liable for its worker’s conduct.

Critical to the common-law determination of an employer’s derivative liability was the “control of the details” test, where an employer’s right to “supervise and control the details of the worker’s actions” meant it could be found liable for injury caused another by its worker, the Dynamex court noted. This test gained traction among courts as the primary standard for ascertaining the existence of an employment relationship between a worker and an employer.

Amplifying the “control of the details” standard beyond its original tort context, the court decided Borello, which set forth a multifactor test to determine whether a worker was an employee or an independent contractor. Borello addressed whether farmworkers hired by a grower to harvest cucumbers under a “sharefarmer” agreement were independent contractors or employees for purposes of California’s workers' compensation statutes. Emphasizing the “remedial purpose” underlying the workers' compensation statutes, the Borello court concluded that the concept of employment is not “inherently limited by common law principles.”

Accordingly, the Borello court held that the “control of the details” standard should be considered in tandem with five disjunctive factors to determine whether a worker is an independent contractor or employee. Those five factors are (1) the worker’s opportunity for profit or loss; (2) the worker’s investment in equipment or material for the commissioned task; (3) whether the service rendered by the worker requires special skills; (4) the degree of permanence of the working relationship; and (5) whether the worker’s offered services are an integral part of the employer’s business. No single Borello factor is dispositive and all factors have equal weight. After weighing those factors, the Borello court concluded that the farmworkers were employees and not independent contractors.

The Dynamex court further observed that federal courts likewise used substantially similar criteria to the Borello factors in construing the existence of an employment relationship. For example, it noted that federal courts interpreting the meaning of the term “employee” in federal statutes often rely heavily on the “control of the details” standard as part of their multifactor analysis, citing the U.S. Supreme Court’s decision in Nationwide Mutual Insurance Company v. Darden.

The California Supreme Court also pointed to the parallels between the Borello standard and the “economic reality” test used by federal courts to interpret the “suffer or permit to work” definition of “to employ” under the Fair Labor Standards Act (FLSA). The “economic reality” standard considers the five Borello factors, and to the extent a worker—as a matter of economic reality—is dependent on the employer and the employer “exercises control” over the worker, then the worker would be considered an employee.

Court Adopts New “ABC Standard”

Because the legislative history of the FLSA suggested that the drafters wanted the “broadest definition” of the “suffer or permit to work” definition of “to employ” to permit coverage for all workers under the FLSA, the Dynamex court concluded that a broad definition of the “suffer or permit to work” standard should also apply California wage and hour orders consistent with the remedial purposes underlying such orders.

To effectuate that broad reading, the Dynamex court fashioned a new, “ABC standard” to provide a “simple and clear” test. Significantly, the ABC standard presumes that a worker is an employee and places the burden on employers to disprove that a worker is an employee. Under the ABC standard, a worker is an employee—and not an independent contractor—unless the employer establishes the following three, conjunctive factors: (1) “that the worker is free from control and direction over performance of the work, both under the contract and in fact”; (2) that the service for which the worker is commissioned is “outside the usual course of the business for which the work is performed”; and (3) that the worker is “customarily engaged in an independently established” occupation. According to the Dynamex court, unlike the ambiguous “control of the details” standard, or the unpredictable multifactor analysis required under the Borello and “economic reality” tests, the ABC standard provides clarity and predictability.

The court repeatedly notes that the wage orders provide fundamental social welfare protections such as a minimum wage to allow workers to obtain a subsistence standard of living.

— Trish M. Higgins, Sacramento, CA

Chair, Wage and Hour Subcommittee, Employment & Labor Relations Law Committee

“In developing this rigorous standard, the court was heavily influenced by the remedial purposes of the wage orders. The court repeatedly notes that the wage orders provide fundamental social welfare protections such as a minimum wage to allow workers to obtain a subsistence standard of living,” observes Trish M. Higgins, Sacramento, CA, chair of the Wage and Hour Subcommittee of the Section's Employment & Labor Relations Law Committee. “The court also wanted to avoid a multifactor standard—like the economic reality standard or the Borello standard—which makes it difficult for businesses and workers to determine in advance how the worker should be classified,” Higgins added.

The predictability of the ABC standard should prod employers to consider the use of hitherto independent contractors in their businesses or else risks severe consequences, according to Kelly M. Matayoshi, San Francisco, CA, cochair of the Section's Employment & Labor Relations Law Committee. “Dynamex should cause employers to take a close look at regularly used independent contractors to see if they can meet the ABC test and presumption that workers are employees. The consequence of misclassifying an employee is high, and for employers who routinely use a large number of independent contractors to fulfill key parts of their business, damages could be crippling,” Matayoshi urges.

Application of the “Usual Course of Business” Remains to Be Seen

Although Section leaders agree the adoption of the ABC standard provides predictability to employers and workers as to who will be considered an employee or independent contractor, they predict application of the “usual course of business” element of the standard may prove difficult.

“As a plaintiff’s attorney, I am happy that the court has embraced a more employee-friendly standard that resonates with the objectives of the state’s protective legislation,” opines Cheyenne M. Chambers, Charlotte, NC, cochair of the Young Lawyers, Membership, and Diversity Subcommittee of the Section's Appellate Practice Committee. “It will be interesting to see how companies react to this ABC test, particularly the second element—my guess is that some companies will revisit their business models in an attempt to redefine which workplace tasks they consider as part of the their ‘usual course of business,’” Chambers adds.

“Future cases are sure to address the contours of this ‘usual course of business’ standard, particularly in the context of deciding class certification,” agrees Herrington. “For example, where the employer makes and distributes a product and is not in the delivery business like Dynamex, is delivery still within the usual course of business? Defense counsel will have the challenge of articulating how, under this new standard, class certification is improper,” he surmises.

Distinct from the applicability of the “usual course of business” element of the ABC standard, the uncertainty, identified by the Dynamex court in multifactor tests such as Borello and the “economic reality” standards, is inherently flawed, according to Matayoshi. “The disadvantages of the multifactor tests noted by the court include the lack of certainty in how to categorize workers,” Matayoshi observes. “This ambiguity is a double-edged sword for employers, who on one hand enjoy the freedom of creative work situations but bear increasing risk of misclassification without a clear standard. For attorneys advising their clients, the court makes it clearer for attorneys to provide guidance and advice to their clients, while at the same time making provision of creative solutions to employer problems more difficult. Attorneys should proactively reach out to their clients to advise them of this shift so the client can reevaluate and audit their independent contractors,” Matayoshi advises. 

 

Kelso L. Anderson is an associate editor for Litigation News.

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