California Supreme Court Holds That Contractors Cannot be Crucial to Business Model

Date: May 09, 2018

California businesses should take note of the California Supreme Court’s April 2018 decision in Dynamex Operations West, Inc. v. Superior Court. In that opinion, the Court imposed a new and more demanding standard for designating a person providing services as an “independent contractor.” As a result, working with independent contractors may now be more difficult than in the past.

The Dynamex Court Endorsed the “ABC Test”

The Dynamex Court affirmed that an employer-employee relationship exists for California wage-and-hour law if a business has suffered or permitted an individual to work. As the Court explained, this is a broad standard that will cover “all individual workers who can reasonably be viewed as ‘working in the [hiring entity’s] business.’” As such, the opinion stressed that a worker cannot be viewed as an independent contractor if their labor is essential the hiring entity’s business model. For this reason, the opinion has generated a great deal of commentary. For example, CNN Money and the New York Times discuss implications for the “gig economy.”

Yet the decision is of broader significance to California small business owners who may have relied in the past on the case-specific multifactor economic realities test, which we discussed here. In this case, the Dynamex Court rejected the economic realities test in favor of the more formulaic ABC test, which require employers to prove: “(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.”

Here are the key takeaways from Dynamex:

• Part A. An independent contractor must be free from the exertion of control of the type and degree exercised over employees—regardless of whether the control is imposed by contract, or as a matter of course. In other words, the greater the oversight imposed, the greater the likelihood that the worker will be classified as an employee.

• Part B. Not only must a business show that they are treating “independent contractors” differently than actual employees, but it must show that “independent contractors” are performing work distinct from the sort of roles performed by employees within the “usual course of business.” As such, this prong of the test focuses on the nature of the worker’s role within a hiring entity’s usual business operation. If a worker “would ordinarily be viewed by others as working in the hiring entity’s business…” they are likely to be classified as an employee, regardless of whether the worker agrees to work as an independent contractor.

Chief Justice Cantil-Sakauye offered guidance: “[O]n the one hand, when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee. On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company, or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees.”

• Part C. To be classified as an independent contractor, it must also be shown that the worker has “take[n] the usual steps to establish and promote his or her independent business—for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.” In the absence of such evidence, there is a great risk that a reviewing court may view the independent contracting label as unilaterally imposed by the hiring entity. For that matter, “[t]he fact that a company has not prohibited or prevented a worker from engaging in such a business is not sufficient to establish that the worker has independently made the decision to go into business for himself or herself.”

Should Businesses in the Other States be Worried?

The Dynamex decision has garnered attention in the national media. And there is some cause for concern that this may prompt other jurisdictions to make similar changes, especially given that the California Supreme Court is considered influential among the courts. But there is also a good reason for thinking that Dynamex should not influence independent contracting cases in other states.

Notably, the U.S. Department of Labor applies the more flexible economic realities test under the Fair Labor Standards Act, which uses the same “suffer or permit” language. Likewise, numerous other states use similar language while applying the economic realities test consistent with U.S. DOL. And while the Dynamex decision might conceivably prompt courts in other jurisdictions to move to the more stringent ABC test, there is one key difference between California and many of these other states: California’s “suffer-or-permit-to-work standard” predates the enactment of the FLSA. By contrast, others states modeled their wage and hour laws on the federal standard, which is a very good reason to limit California’s decision.

For more guidance on working with independent contractors, check out our Legal Guide Series.

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