Member Article

In a unanimous decision, the California Supreme Court recently addressed the standard to determine whether a worker is an independent contractor or an employee in wage and hour disputes under California’s Industrial Welfare Commission (IWC) wage orders.  In Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, Plaintiff drivers for Dynamex alleged they were misclassified by Dynamex as independent contractors, in violation of California wage and labor laws.  The decision has important implications for California employers, especially those participating in the gig economy.

The gig economy refers to the labor marketplace oriented around workers who engage in short-term contracts and temporary work.  Uber (taxi services), Airbnb (lodging), TaskRabbit (freelance labor for everyday tasks like cleaning or moving), and Postmates (food delivery) are examples of gig economy companies.  The gig economy is characterized by freelance workers who can choose to work a job where they want and as frequently as they want.  These short term jobs provide immense flexibility in comparison to more “permanent” full time jobs, and many workers use the gig economy to supplement their full time occupation.  The gig economy is powered by independent contractors, but this classification has proven troublesome as businesses attempt to properly classify these individuals.  Proper worker classification is important, because an independent contractor is not eligible for minimum wage, overtime, unemployment benefits, and other protections the law affords employees. 

In Dynamex, the California Supreme Court determined that the Borello test for analyzing employment status, from S.G. Borello & Sons Inc. v. Department of Industrial Relations, does not apply to wage and hour claims under California IWC wage orders.  The Court turned to the IWC definition of an employee and the so-called “ABC” test used in other jurisdictions.  The IWC defines “employ” as “to engage, suffer, or permit to work.”  To analyze this standard, the Dynamex Court then used the “ABC” test, adopted by several other states such as New Jersey and Massachusetts.  The test presumes that a worker is an employee, unless the business can establish three factors:

A.        That the worker is free from the control and direction of the hirer in connection with performance of the work;

B.        That the worker performs work that is outside the usual course of the hirer’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 for the hirer.

A failure to establish any one of these factors would mean the worker should be treated as an employee under California’s IWC. 

Recent lawsuits by gig economy workers challenging their classification have resulted in multi-million dollar settlements.  The Dynamex ruling comes after the February 2018 decision in Lawson v. Grubhub et al.  In Lawson, a California federal district court determined that Plaintiff food delivery driver was correctly classified by Grubhub as an independent contractor under the Borello test, which evaluates the level of control the hirer exercises over the worker based on the daily aspects of their relationship.  Lawson is now on appeal. 

The Borello test, stemming from California Supreme Court case S.G. Borello & Sons v. Department of Industrial Relations, evaluates the total circumstances of the working relationship through a list of factors.  The more control the hirer exercises over the worker, the more likely it is that the worker should be classified as an employee.  However, it is important to note that the Borello test was born long before the gig economy’s meteoric rise, and the legal issues surrounding worker classification in the gig economy were not easily addressed by applying that test. 

More classification questions will surely ensue from Dynamex, as this decision will affect any pending misclassification suits, including the Lawson appeal.  For example, under Factor C, in order for a company to classify a worker as an independent contractor, the worker must be engaged in the company’s particular business as the worker’s independent and separate occupation.  However, one major characteristic of the gig economy is the ability of the workers providing gig services to participate in these gigs as their side jobs, outside their occupation or profession.  Moving forward, California courts will have to shed light on what these three factors mean in practice.  The Dynamex decision provides a framework, at least, for companies to analyze their worker classification decisions.

Employers in the gig economy face challenges when attempting to promote economic growth of their business consistent with the rights of their workers.  When workers are misclassified, employers can face legal ramifications.  Now, the fact-determinative classification test under Borello has been replaced by the seemingly stricter “ABC” test from Dynamex.  This decision sets forth distinct and worker friendly criteria for use by companies in classification determinations.  Right now, as the gig economy continues to expand, California businesses, especially those participating in the gig economy, should closely evaluate their relationships with their workers under the “ABC” test and stay tuned for further analysis of these factors in upcoming court decisions.