California Supreme Court Renders Huge Victory for California Workers, Stops “Independent Contractor” Scams

In Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court issued a landmark decision altering the test for determining whether a worker should be classified as an employee or an independent contractor for purposes of enforcing California’s Industrial Welfare Commission (IWC) wage orders, which set the standards for minimum wages, overtime payments, meal and rest breaks, and other working conditions. In a unanimous ruling, the Supreme Court made it much more difficult for employers to classify “employees” (entitled to all kinds of legal protections and benefits independent contractors do not have) as “independent contractors.”

The Supreme Court applied the “ABC” test, already adopted in Massachusetts and New Jersey, to determine whether a class of delivery drivers should have been classified as employees and entitled to the protections of the applicable wage order. Under the new test, a worker may only be considered an independent contractor if the hiring entity (i.e. the employer) establishes all of the following:

(A) The worker is free from the control and direction of the hiring entity in 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; and

(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.

The burden is on the employer to prove that all three of these requirements are satisfied. There is, therefore, a presumption of employee status that must be rebutted in order for the employer to prevail.

Take a close look at these tests—think about truck drivers who work for delivery or construction companies, or janitors who work for cleaning companies, or Uber/Lyft drivers who work for driving companies, or high tech workers who support large companies or develop their projects, doing just what regular employees do. All these kinds of jobs will get a second look, and so affected California workers can be eligible for employee benefits that are not available to independent contractors (starting with work conditions like rest breaks, meal periods, usually overtime and seventh day pay, and so on).

In recent years, the hiring of workers as independent contractors—exempting them from government rules regarding minimum wage, overtime and rest breaks—has exploded. The Supreme Court acknowledged this reality in the Dynamex decision, and structured its opinion to avoid precisely these abuses. The Supreme Court admonished that “[w]hen a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor by the unilateral action of a hiring entity, there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification.”  In other words, it’s the worker who will be deciding whether he or she intends to be an independent contractor—it won’t be enough for an employer to simply say “you are an independent contractor” and leave it at that.

This decision has one important limitation:  it is all about Wage Order benefits.  We do not yet know exactly how it will affect workers’ compensation, health benefits, and other sorts of benefits not mentioned in the Wage Orders. This decision will likely have a huge impact on the “gig economy,” where employers rely heavily on workers classified as independent contractors to execute their business model. We expect there will be litigation and serious lobbying in Sacramento to undermine this decision. We will all have to be “on guard” to protect this win.

For Unions, this is an incredibly important decision—all kinds of workers in construction, trucking, tech, janitorial services, personalized health care, and so on, will be reclassified as “employees” and therefore, they can join Unions and fight for collective bargaining agreements.

For more information about this recent case, contact your labor law counsel.

By Jolene Kramer | May 2, 2018

Legal Developments