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Contractor or Employee? Dynamex Decision Classifies Workers with ABC Test

C alifornia is making headlines as it leads the United States in overhauling its labor laws. Putting aside the passing of the new California privacy bill in May, the California Supreme Court, the highest court in California, adopted a three-part test in the Dynamex case in order to determine whether an individual is a contractor or an employee of a company.

To summarize, the court looked at which standard applies when determining whether a worker should be classified as an independent contractor or an employee solely for the purpose of California wage orders, which impose obligations related to minimum wage, maximum hours an individual can work, and basic working conditions, such as meals, rest breaks, etc.

The underlying suit revolved around two delivery drivers who sued Dynamex Operations West (Dynamex) for misclassifying those drivers as independent contractors. According to the complaint, the drivers alleged that the misclassification was a violation of the Industrial Welfare Commission wage order No. 9, a California wage order governing the transportation industry, and numerous violations of the Labor Code. Thus, Dynamex was accused of unlawful business practices under California Business and Professions Code section 17200.

[Related: Independent Contractor Relationships in the Age of Uber]

After reviewing the history of the case to date, the Supreme Court ultimately agreed with the Court of Appeals that the trial court was correct in concluding that the "suffer or permit to work" definition of "employ" contained in a wage order could be relied upon to classify a worker. This test looks at whether a worker performed work that the employer knew or should have known about.

While Dynamex argued that this test only applies in the joint employer context, and in the alternative, that the standard should not be used to classify a worker, the court found that the standard was intended to have more reach than Dynamex suggested. Dynamex further argued that allowing this test would result in all workers who provide services to businesses being classified as employees. The court rejected this argument as well, stating that the test is relevant, the standard is useful, and, that while the literal language may not resolve classification inquiries, the standard is still beneficial for purposes of determining classification in the context of a wage and hour statute or regulation.

The court then adopted a standard referred to as the "ABC" test, which is used in other jurisdictions when classifying wage orders. Under the ABC test, a worker is considered an independent contractor where a wage order would not apply only if the worker:

A. 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. Performs work that is outside the usual course of the hiring entity's business; and,

C. Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The court then looked at the facts of the case and determined that since December 2004, Dynamex drivers have performed the same tasks in the same manner as when drivers were classified as employees, thus a misclassification exists.

Notably, the court pointed out that the public will ultimately assume the responsibility for misclassified workers and that, because of this, wage orders are widely beneficial. Without a wage order in place, a worker may receive a substandard wage or fall victim to unhealthy and unsafe working conditions. The court then placed the burden on companies to establish that the worker is an independent contractor who should not be covered by a wage order, and the company also has the burden of establishing each of the three factors in the ABC test.

[Related: The Modern GC: Embracing Self-service Contracts]

This ruling will impact companies across several industries in how they assess their hiring needs, classify their current contractors, and update their policies in order to be compliant with the court's ruling and the ABC test.
As the court points out, under the previous law, California was losing billions of dollars per year in tax revenue, and millions of workers were deprived of labor law protections through misclassification. Thus, it appears the state has a clear incentive to ensure that the court's ruling is followed and that companies like Dynamex properly classify their workers.

About the Author

Julianna Orgel-EatonJulianna Orgel-Eaton is a senior corporate counsel at Ziff Davis, LLC. She is an experienced intellectual property attorney who regularly provides strategic advice regarding the availability, validity, and enforceability of trademarks. Currently, her practice focuses on commercial contracts, licensing, advertising, and media law issues as well as brand protection.

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