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Article: May 2018: California Supreme Court Decides Workers Are Presumed Employees

Business Litigation Reports

A recent headline in the Los Angeles Times declared: “California’s top court makes it more difficult for employers to classify workers as independent contractors.” The headline is ironic in that the Supreme Court in Dynamex Operations West v. Superior Court (decided April 30, 2018) said it was setting a rule that would make classification decisions easier. But if by “more difficult” the Times meant “nearly impossible” to classify a worker as anything other than an employee, as least for wages, then the headline makes a good point. This decision has important implications for the gig economy. The ruling suggests that gig-providers like Grubhub, Uber, Lyft, and others will not be able to continue to treat their drivers as independent contractors in California without complying with California minimum wage and overtime laws.

Prior Law
For nearly 30 years California courts used multiple factors, which had been established in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), as the only appropriate standard for distinguishing employees from independent contractors. All factors had to be considered, although the most significant of those was control. Using this test, a federal district court found, less than three months prior to the Dynamex decision, that a driver for Grubhub was an independent contractor—not an employee—under California law. No. 15-CV-05128-JSC, 2018 WL 776354 (N.D. Cal. Feb. 8, 2018).

Grubhub delivers food to customers who order using their smart phones. The plaintiff was a delivery driver for four months before bringing suit alleging the company improperly classified him as an independent contractor rather than an employee, thereby violating California’s minimum wage, overtime, and employee expense reimbursement laws.

To determine whether the driver was an employee or an independent contractor, the court applied the test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (Cal. 1989). The multi-factored test primarily focuses on the level of control a principal asserts over its agent; the more control a principal possesses, the more likely thevagent will be considered an employee instead of an independent contractor. Id. at 350–51. But in addition to control, the Borello test requires consideration of secondary factors, including the level of skill involved, whether the work typically involves close supervision, and whether the principal provides the tools and instrumentalities for completing the work. Id. at 351.

The district court found that Grubhub lacked the “necessary control” over when and how its driver performed deliveries. Grubhub put no restrictions on the types of vehicles its drivers could use; nor imposed requirements on the vehicle’s condition. Drivers did not receive any training or orientation or performance evaluations. Drivers could even work for competitors while delivering for the Grubhub. Finally, drivers had complete control over their schedules. While Grubhub set up “blocks,” or shifts, that drivers could signup for, there was no minimum or maximum number of blocks. In fact, a driver did not need to sign up for any blocks.

The court found that some secondary factors weighed in favor of an employment relationship. The level of skill required was not very high (anyone with a driver’s license could deliver for Grubhub); The plaintiff was not engaged in a distinct business or occupation; and, in practice, he was paid an hourly rate, which is typical of an employment relationship. Other secondary factors favored independent contractor. The driver did not have a supervisor. He provided his own vehicle, smart phone, and internet connection. Finally, the Plaintiff’s work at Grubhub was short-lived, and he could stop making deliveries at any time.

The ABC Test
The Supreme Court discarded the multi-factor test and replaced it with the “ABC” test. Dynamex Operations West, Inc. (Dynamex), is a nationwide same-day courier and delivery service. Two delivery drivers sued, alleging that they had been misclassified as independent contractors instead of employees. Dynamex could show a lack of control over its drivers similar to Grubhub. Drivers were generally permitted to set their own schedule, determine the sequence of same-day deliveries, deliver for other companies when not performing Dynamex work, and hire or contract with others to make Dynamex deliveries for them. The plaintiffs brought claims for violations of both the Labor Code and applicable state wage orders. Dynamex argued on appeal that the lower courts used the wrong definition of employee. Dynamex won that argument but lost its appeal because the new definition the Court established is more inclusive than the pervious one. The Court decided that in determining whether a worker is an employee or independent contractor (1) the burden is placed on the hiring entity to establish that the worker is an independent contractor; and (2) the hiring entity, in order to meet this burden, must satisfy three conditions – the so-called ABC test:

(A) The worker 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) The worker performs work that is outside the usual course of the hiring entity’s business.

(C) 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.

In a procedural quirk, the Supreme Court did not decide whether or not the drivers were in fact employees. The Court decided the test for employee status, and returned the case to the trial court to apply that test. But it does not take a weatherman to tell which way the wind is blowing. The Court noted the hiring entity was a delivery company hiring delivery drivers. Simply looking at the B of ABC test, Dynamex would be unlikely to convince a trier of fact that the delivery drivers are performing work outside the usual course of the company’s delivery business. They are the business.

In another procedural quirk, the Court did not decide whether the ABC test would be used for any issue other than wages. The Court recognized the possibility that the old Borello test might still be applicable to determining, for example, whether a worker is entitled to reimbursement of business expenses. The possibility exists, therefore, that a worker’s status might be “employee” for purposes of wage and hour laws but “independent contractor” for purposes of reimbursement of expenses. And whichever classification the worker might have under state law, the federal government might determine it to be different for purposes of federal taxation.

Finally, there is no reason to suppose that the principles in Dynamex are limited to delivery drivers. Every lawsuit alleging misclassification of workers will cite Dynamex because it virtually obviates what once had been companies’ best defense: lack of control over the worker. Indeed, that factor was dispositive in the GrubHub decision just a few months ago. Going forward, however, lack of control is only the A of the ABC test. A plaintiff could concede that issue and still prevail if the company cannot prove both B -- that the work is outside the company’s usual business -- and C -- the worker has a business that performs work of the same nature as for the company