On April 30, 2018, the California Supreme Court issued a unanimous decision in Dynamex Operations West, Inc. v Superior Court, that has the potential to dramatically alter the employment landscape in California.  I won’t go into the details of the case itself, as it’s not necessary for the purpose of this article, but we’ll get into some of the possible consequences.

Worker Classification – Pre-Decision Factors

In 1989, the California Supreme Court decided the case of S.G. Borello & Sons, Inc. v Dept. of Industrial Relations.  This case effectively gave us a list of several factors that were to be used in deciding whether someone was considered an employee or an independent contractor.  These factors included such things as (somewhat paraphrased):

  • Whether the “employer” has control or right to control the work done, and the manner in which it is done (most important)
  • Whether the “employee” is engaged in a distinct business from the “employer”
  • Whether the work is a part of the regular business of the “employer”
  • Who supplies the tools necessary for performance
  • Any investment made by the “employee” for equipment, materials, etc., to perform the work
  • Whether the service rendered requires a special skill;
  • The kind of occupation
  • The “employee’s” opportunity for profit or loss depending
  • The length of time for which the services are to be performed;
  • The degree of permanence of the working relationship;
  • The method of payment, whether by time or by the job; and
  • Whether or not the parties believe they are creating an employer-employee relationship (related, but not the final word)

These 12 factors consisted of the standard method for determining the appropriate classification for a worker.  If you messed up and failed to classify a worker properly, you faced some harsh penalties.  But there was some wiggle room there.

What Dynamex Did

The Dynamex decision changed the landscape by providing a much simpler, easier to assess 3-prong test to determine whether a worker is an independent contractor or a true employee – but only when California Wage Orders are involved (i.e., minimum wage, overtime, meal and rest periods, hours of work, and other basic working conditions).  Under the “ABC Test” as it is known, an employer must prove each of the following to justify independent contractor classification:

  1. 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;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Did you see the part where it says each of these must be proven?

Why I Love The Decision

This decision provides California Employers with a clearer standard under which they can assess whether they are classifying employees properly.  They don’t have to guess and hope they’re not wrong if any issues come up.

This has essentially created a preference for a formal employer/employee relationship which will do a few things, including, but not limited to:

  • Require proper compliance with minimum wage laws. No, paying on a commission-basis doesn’t mean someone is automatically an independent contractor and doesn’t mean you don’t have to comply with minimum wage requirements.
  • Employers will be subject to appropriate regulations. By properly classifying employees, an employer may then have the requisite threshold of employees to be subjected to additional employment regulations (i.e., FMLA)
  • Improved wages and potentially employee benefits.
  • Increased payment of Social Security, payroll, unemployment insurance, worker’s compensation and employment taxes.

Seems like a win across the board right? At least for the employee.

Why I Hate The Decision

I’m not completely sold on this decision not having the opposite of what it seems it’s intended effect is.  This decision suggests a shift away from the current economic reality – use of Independent Contractors as foundational component of business organization.  This is the gig-economy, after all.

It gives the employee all of the power and none of the burden – at least on paper.  We’ll have to wait and see how this new test actually plays out, but the biggest problem I see with it is that it places much of the burden of good-faith on the employer.

How far will employers be required to go in order to verify outside engagement by the would-be employee?  How often – monthly, quarterly, annually, project to project? What if there is a change of circumstances and the employee decides to stop engaging in business, but fails to notify the employer?  Should they be required to notify the employer of such an event?

Obviously, these are all “what-ifs”, but I think these are some extremely important considerations. That’s the world business lives in….preparing for those moments to ensure you’re protected.

In addition to the what-ifs, this decision has the potential to shut down other businesses because of the necessary restructuring they would have to undergo to comply with the new standard.

In today’s gig-economy, there are several businesses that rely on independent contractors for their business model – however, because of prong 2, they may have some serious pivots to make, perhaps even changing the way they create revenue.  Think Uber, Lyft, Wag, Postmates, and other similar companies.

Perhaps it’s a simple fix by changing the business’ public perception.  Uber for example, is considered by the majority of the population to be in the “ride share” business.  They connect people to willing drivers to get them from point A to point B.  But they aren’t any deeper into the ride-share business than Amazon is in the home furnishings business.  They simply provide the “vehicle” to connect the consumer with a service provider.

Uber is a software company through and through.  It sells software access, not rides.  Perhaps it needs to be clearer about that.

What This Means For Your Business

Realistically, this decision shouldn’t have a major effect on most businesses.  But it will because of how freely independent contractors are generally used.  So here are 3 take-aways for your business to consider as a result of this decision and the ABC test.

  • Before hiring new staff, get your employment agreements professionally reviewed. Don’t rely on something you found online as it may cost you more in the long run.
  • Take another look at your business operations structure, especially in this gig-economy, to determine whether, under the new standard, it makes sense for you to continue operating with independent contractors (if you do so regularly).
  • At this point, it’s unclear whether this test will apply retroactively. Given the presumed intent behind the decision and the fact that state’s with similar tests are considered to be the most stringent in the Country, my guess is that it will be applied retroactively, to an extent.

We won’t get clear answers on the true impact this decision will have for several years, but it will be important to keep an eye on it.