By Kim Silvers, SPHR, PHRca, SHRM-SCP

The California Supreme Court recently ruled in the Dynamex Operations West, Inc. v. Superior Court that the Company’s independent contractor drivers were employees under a new definition.  Dynamex is a nationwide package and document delivery company for retail stores, such as Office Depot and Home Depot.  They have been dealing with a class action suit by the drivers for 13 years.  The drivers claimed they were actually employees and, as a result, fell under the CA industrial Wage Order that afforded them additional rights for wages and how hours were paid. 

Prior to 2004, Dynamex classified its California drivers as employees and compensated them pursuant to this state’s wage and hour laws. In 2004, Dynamex converted all of its drivers to independent contractors after management concluded that such a conversion would generate economic savings for the company. Under their policy, all drivers were treated as independent contractors and required to provide their own vehicles and pay for all of their transportation expenses, including fuel, tolls, vehicle maintenance, and vehicle liability insurance, as well as all taxes and workers’ compensation insurance.

In essence, the underlying action rested on the claim that, since December 2004, Dynamex drivers performed essentially the same tasks in the same manner as when its drivers were classified as employees, but Dynamex had improperly failed to comply with the requirements imposed by the Labor Code and wage orders for employees with respect to such drivers. The complaint alleged five causes of action arising from Dynamex’s alleged misclassification of employees as independent contractors: two counts of unfair and unlawful business practices in violation of Business and Professions Code section 17200, and three counts of Labor Code violations based on Dynamex’s failure to pay overtime compensation, to properly provide itemized wage statements, and to compensate the drivers for business expenses.

The parties disagreed as to the proper legal standard that is applicable in determining whether a worker is an employee or an independent contractor for purposes of plaintiffs’ claims. 

Long story and many years later… although long-held standards on determining if individuals are employees or independent contractors had been used from the S.G. Borello & Sons, Inc. v. Department of Industrial Relations decision[1], that has been turned on its ear with the Dynamex case.  And it’s a serious warning for CA employers who have or are considering any independent contractors.

In essence, the Supreme Court outlined the new ABC test that presumes a worker hired to perform services is an employee of the hiring entity.  The hiring entity must prove all three (A, B and C) of the following in order to warrant a position begin classified as an Independent contractor:

Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes:

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 such 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 for the hiring entity.

The new ABC test applies only to CA  Wage Order claims.  (This would relate to issues such as minimum wage, overtime, meal and rest break violations.) The Borello definition still applies for non-wage order claims, such as reimbursement of business expenses.

For A above, the Court clarified that the hiring entity must not exercise control over the performance of the work.  That means get out of the way in day-to-day instruction as well as noting it in the contractual language.

For B above, the Court noted the example of a retail store hiring a plumber to fix a leak.  The plumbing work is not a part of the usual business of the retail store.  Of course, Dynamex was using drivers to do the business the Company was in the business to do – driving!

And for C above, the Court also noted that the hiring entity must show that the worker made the independent decision to go into business for himself and that the business is actually in operation.

California business  that classify some workers as independent contractors will want to review their relationship under the “ABC test.”  We strongly suggest legal counsel review any independent contractor relationships you wish to continue.

[1] The Borello test involves the principal factor of “ ‘whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired’ ” as well as the following nine additional factors: “(1) right to discharge at will, without cause; (2) whether the one performing the 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 worker 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) method of payment, whether by the time or by the job; (8) whether or not the work is part of the regular business of the principal; and (9) whether or not the parties believe they are creating the relationship of employer-employee.”