California Supreme Court Strengthens Employee Protections
For almost two years, employers have been anticipating the California Supreme Court’s ruling in the Dynamex Operations West, Inc. v. Superior Court of Los Angeles case, [Case Nº S222732, decided April 30, 2018), about the critical test as to determining employee-versus-independent contractor status. The ruling was unanimous, and strong for employee protections against misclassification. The Supreme Court employed an updated test which makes it much harder for employers to prove that a worker is an independent contractor, as opposed to an employee.
The existing law has been dominated by the test in S. G. Borello & Sons, Inc. v. Department of Industrial Relations [(1989) 48 Cal. 3d 341, 350]. That test considered multiple factors, including , most importantly, whether the employer had a “right to control” the “manner and means” by which a worker performed his or her tasks. Other factors included (1) “right to discharge at will, without cause”; “(2) whether or not the one performing services is engaged in a distinct occupation or business; (3) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (4) the skill required in the particular occupation; (5) whether the principal or the workman supplies the instrumentalities, tools and the place of work for the person doing the work; (6) the length of time for which the services are to be performed; (7) the method of payment, whether by the time or by the job; (8) whether or not the work is a part of the regular business of the principal; and (9) whether or not the parties believe they are creating the relationship of employer-employee” [citing Empire Star Mines Co. v. California Employment Commission (1946) 28 Cal. 2d 33, 43-44, 168 P. 2d 686].
• If the worker had any investment in any of the employer’s businesses;
• If the worker was performing according to specifications, instructions and/or procedures provided by the employer;
• if the worker’s services were provided for the exclusive benefit of the employer;
• if the worker’s services are in the nature of continuing, but not a single, transaction;
• If the worker had a right of control over the operation of the business;
• If the worker was engaged in a totally separate and distinct occupation from the employer’s business;
• If the worker’s work is of a type usually done with or without the employer’s instructions or specifications;
• If the worker’s skills are very unique;
• If the employer supplied tools, supplies or a place to work;
• If the employment was continuous in nature;
• If the work was part of the employer’s regular business;
• If the worker’s perception was that he was a regular employee;
• If the worker was to or did perform pursuant to the employer’s instructions, rules and/or practices; and
• If the worker had any discretion to make any business decisions which materially affected the profits and losses of the employer’s business.
In Dynamex, the California Supreme Court articulated a somewhat more realistic and more critical test, the “ABC Test”, which finds that a worker will be deemed an employee ONLY if all three test prongs are established by the employer:
The first part of the ABC Test is basically the same Borello test noted above. Commentators have read this to mean that independent contractors must be FREE FROM the control and direction of whom they are working for, looking to actual performance of the work, and not just the contract, job description or whatever boilerplate language about employee control an employee manual might have.
The second, and new, part of the ABC Test, basically clarifies and makes stronger the Borello factor of whether the work was part of the employer’s regular business, rephrasing it to inquire if the worker carries out work that is outside the usual work undertaken in the business in issue. This prong presents perhaps the most marked change from the old Borello test. The Dynamex court distinguished between work done by a hirer’s “usual course of business”, such as a seamstress working out of his or her own home, sewing items for a clothing manufacturer (in which case the seamstress is doing work that is within the hirer’s “usual business operations”), and work done outside a hirer’s “usual course of business”, such as what a plumber or electrician would do, if hired by a retailer, to do something like repairing leaks, installing electrical lines, etc. (in which case such work is outside of a retailer’s “usual course of business”).
The third part of the ABC Test clarified and greatly strengthened the factor of whether a worker is “customarily engaged” elsewhere doing the same kind or work, in other words if he or she has had a definable separate business engaged in work of “the same nature” of work as he or she performs for the hirer in issue. The Court discussed that beyond cases in which a worker is forced to sign an agreement that contains an “exclusivity” clause, there are more cases in which the employer does not expressly prohibit the worker from providing similar services to others. However, now, the employer will have to prove that the worker has also provided similar services to others in order to be deemed an independent contractor. The Court used even stronger language, to the effect that to be an independent contractor, the worker must have made a conscious decision “to go into business for himself or herself” (factors of which would include having procured a license in his or her own name, actually creating a duly incorporated company, and/or advertising his or her independent services openly.
Now, the employer has the full burden to prove ALL three parts of the test, otherwise, failure to prove any one of the three factors could subject the employer to hefty statutory penalties for “misclassifying” the workers, of between $5,000-$15,000 for each “willful” violation.
Last, previously, these tests applied only to certain liability issues such as minimum wages, overtime, meal and rest period penalties and things such as non-itemization penalties, things set out in detail in the D.L.S.E. Industrial Welfare Commission Wage Orders, but many expect this broad ruling to be applied to such areas as 1099’s-vs-W-2s, whether a worker si covered by an employer’s worker’s compensation insurance or unemployment insurance, and even tax treatments.