The title may be what every little kid learns (and an underappreciated classic by the Jackson 5), but per usual California is different. Many California workers may find their employment status shift as a result of a recent decision by the California Supreme Court which significantly expanded the universe of workers likely classified as employees instead of independent contractors. This change may leave some workers toe-tapping and singing “do, re, mi;” however, others may not share a similar glee over the potential change. True, the shift in status would mean that these workers would be entitled to additional protections and benefits, such as paid vacation, sick leave, health insurance and unemployment benefits, but like most things in life, it comes with a price… their freedom. The autonomy and freedom that independent contractors enjoy is highly valued and is one of the reasons these types of jobs (particularly in the gig economy) have become quite popular. This freedom could vanish soon due to the new “ABC test” in California which makes it harder for employers to show that workers qualify as independent contractors for purposes of California wage orders.
The landmark decision, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, came down on April 30. Much like Max Richter’s Sleep, the decision is not brief. In 82 pages, the Court reinterpreted and bid adieu to the multifactor Borello test it had been using for nearly three decades to determine employee status.
D is for Dynamex
Instead of throwing their hands up in the air, saying “Ayo! Gotta let go,” two individual Dynamex delivery drivers sued on their own behalf and on behalf of a class of alleged similarly situated drivers. The drivers claimed that Dynamex allegedly misclassified drivers as independent contractors, and as a result, that Dynamex had allegedly engaged in unfair and unlawful business practices under Business and Professions Code section 17200.
S is for Supremes
Rather than “keep [us] hanging on,” the California Supreme Court granted review to clarify the standard for determining employee or contractor status in the wage order context. The Court began the opinion with a broad characterization of the misclassification of independent contractors as harmful and unfair to workers, to honest competitors, and to the public as a whole. The Court provided a long and detailed analysis of the relevant case lineage – carefully analyzing previous case law, and then applied the “ABC test.”
Using the ABC test for worker classification is not new. Approximately half of all states use variations of this test to evaluate employment relationships. Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and therefore, an employee for wage order purposes, unless the putative employer proves:
(A) that the worker is free from the control or 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.
Each of these requirements must be met in order for the presumption that a worker is an employee to be rebutted.
I is for Impact
Worker classification is of considerable significance to workers, businesses, and the public generally. Employers bear the responsibility of paying Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing workers’ compensation insurance, and complying with the seemingly endless state and federal statutes governing the wages, hours, and working conditions of employees. Many businesses, particularly those operating in the gig economy, are premised on the use of independent contractors due to the benefits associated with using such workers, such as lower labor costs and increased staffing flexibility, including the ability to more quickly react to changing business needs.
W is for Wipeout
The Dynamex decision could seriously disrupt the gig economy and has the potential of “wipin’ out” many benefits companies rely upon in utilizing independent contractors. It could also impact the benefits workers enjoy as a result of their independent contractor status. As previously noted, gig workers have a tremendous amount of flexibility in hours and pay. Earning capacity is directly tied to the amount of work an individual decides to take on and can vary from day to day. Time truly is money in the gig economy. Additionally, gig work is constantly varied – both in the type of work one can do and in the type of people one will meet. Gig workers are free to take vacations whenever they want because there is no expectation of their availability. This freedom and flexibility allows gig workers to focus on their families and friends as well as hobbies and pastimes – something that the traditional workplace may not afford. Gig workers are also able to see what it is like to run their own business but have somewhat of a safety net. This fosters entrepreneurship and creativity. Whether Dynamex will wipe this all out remains to be seen.
E is for Epic
There is not just doom and gloom here for employers though. On May 21, 2018 in Epic Systems v. Lewis, the Supreme Court of the United States ruled that courts must enforce individual arbitration clauses in employment contracts and upheld the enforceability of arbitration agreements containing class and collective action waivers of wage and hour disputes. While not a complete solution to the problems the “ABC test” may cause California employers, it does provide companies with a significant tool to prevent class or collective litigation over classification disputes. In fact, Epic was recently relied upon in a consolidated misclassification case before the Ninth Circuit (arguing that the drivers should honor the arbitration clauses and submit their individual disputes to arbitration), and in upholding the arbitration clauses, the Ninth Circuit appears to be marching to that same Epic drum.