On Monday April 30th, 2018, the California Supreme Court issued a landmark decision that helps to clarify the distinction between a worker and an independent contractor. The case is Dynamex Operations W., Inc. v. Superior Court, No. S222732, 2018 Cal. LEXIS 3152 (Apr. 30, 2018).

In the underlying lawsuit to this matter, two delivery drivers, each suing on their own behalf and on behalf of a class of similarly situated drivers, filed a complaint against their employer Dynamex Operations West, Inc. (here on in known as Dynamex), a nationwide package and document delivery company. The complaint alleged that Dynamex had misclassified its delivery drivers as independent contractors rather than employees. The drivers claimed that Dynamex's alleged misclassification led to a violation of the California Labor Code, and of provisions of Industrial Welfare Commission (IWC) wage order No. 9, the applicable state wage order governing the transportation industry. As a result Dynamex has, allegedly, engaged in unfair and unlawful business practices under California Business and Professions Code section 17200.

Before 2004, Dynamex classified drivers who performed pickup and delivery work as employees. In 2004, however, Dynamex adopted a new policy and contractual arrangement under which all drivers were classified as independent contractors instead of as employees. Dynamex maintains that due to the new contractual arrangement, the drivers are properly classified as independent contractors. This came with no change to the driver's assignments or duties.

After the issue was returned to the trial court for consideration, the trial court certified a class action relying on the three alternate definitions of the terms “employ” and “employer” set forth in the applicable wage order and as discussed in the 2010 Supreme Court decision in Martinez v. Combs, 49 Cal. 4th 35, 64 (2010). In Martinez the Court defined “employ” in three alternative ways (1) to exercise control over the hours, wages, or working conditions, (2) to suffer or permit to work, or (3) engage, thereby creating a common law employment relationship. The second definition was derived from statutes prohibiting and regulating child labor, dating back to the early 1990's. The statutes imposed liability based only on “the defendant's failure to exercise reasonable care to prevent child labor from occurring.” In response, Dynamex filed a writ petition in the Court of Appeal, maintaining that definitions (2) and (3) did not apply to the classification analysis, and asked the court to apply the multifactor test from S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989).

The Borello Court held that the “right to control” the means and manner in which work is performed by a worker is the most important of the factors to be considered when analyzing classification. The test is more flexible due to the way it balances the different factors to rely on the specific circumstances in each case.

The Supreme Court characterized the misclassification of employees as independent contractors as harmful and unfair to workers, honest competitors, and the public at large. The Court interpreted the Borello test as going beyond the traditional common law classification analysis, and determining that it called for the application of a statutory purpose standard in order to determine which classification achieved the legislative intent and objective of the statutes as written. The Court rejected Dynamex's arguments that the Borello test should control, and that the Martinez decision was limited to joint employment questions. So, under Martinez, a worker is an employee if he or she is “employed” by an “employer”, and “employ” is defined as “(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship”.

The Court decided to implement a test that is used in several other jurisdictions, that assumes that a person is an employee unless the employer can actually show that “(A) 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; and (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.” All three of these requirements need to be met in order to determine that a worker is an independent contractor instead of an employee.

Editor's Note:

This decision is hugely significant for businesses, workers, and the general public. The previous test was a multi-faceted test that was used for 3 decades and was ultimately a little murky. The new test that the Supreme Court adopted is much more straight-forward, assigning workers employee status and then charging the employer with the task of proving that that worker is actually an independent contractor. This distinction is important because when a worker is classified as an employee, the employer becomes responsible for paying Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing workers' compensation insurance, and complying with the state and federal statutes governing wages, hours, and working conditions of employees. In contrast, independent contractors work without many of these protections that we often take for granted in labor and employment law.

In the rising popularity of the “gig economy” many businesses are based on their use of independent contractors. There are several huge companies in the “gig economy” that are based out of California who previously deemed all workers as independent contractors that this decision will affect, increasing their costs and forcing them to treat their employees a little differently.

The earlier mentioned “statutory purpose standard” simply means that the remedial purpose of any employment legislation must always be taken into account in the classification analysis.

The distinction between an employee and an independent contractor often arises in insurance coverage disputes. In a normal situation involving an employee who suffers an on-the-job injury, the worker is generally covered by workers' compensation, a form of insurance that provides wage replacement and medical benefits to employees who are injured or fall ill resulting from workplace conditions. In most states, laws require employers to have workers' compensation insurance in place to cover their employees. Employers are under no obligation to provide the same worker protection to independent contractors.