Worker Misclassification: How the Dynamex Operations West, Inc. v. Superior Court Case Can Affect You As An Employer

As an employer, it is important to understand that there are strict laws that serve to protect your rights and the rights of your employees. While there are certain laws that will serve to protect employers and employees, these laws can be complex and require that you, as the employer, follow certain guidelines. Further, these laws can also change from one year to another thus making it more critical to obtain current and informed advice.

The State of California recently made a significant change with regard to how the Courts determine whether a worker has been misclassified as an independent contractor rather than an employee. Classification of workers as independent contractors rather than as employees can result in serious consequences if the Courts determine that such was a “misclassification.”  If you or your company is experiencing claims by an employee due to an alleged injustice at work, such as a misclassification, it is vital to seek legal representation from an experienced attorney.

This article will summarize Dynamex Operations West, Inc. v. Superior Court, (2018) 4 Cal.5th 903 and the landmark decision made by the California Supreme Court.

Case Background

Dynamex, a same-day delivery service company, made the decision to convert its employees, who served as drivers, into independent contractors. This decision was made in an effort to cut costs, thus saving the company money. This change prompted two of the company’s drivers to bring forth a lawsuit against the company.

As the case progressed, the company argued that it should be allowed to distinguish employees from independent contractors by using the “control” test developed in the S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. This multi-factor test has been used by California courts to determine whether an employer has misclassified a worker as an independent contractor rather than an employee under certain wage orders. In opposition, the plaintiffs argued that the Court should apply the classification test developed under Martinez v. Combs (2010) 49 Cal. 4th 35, which provides that an employer “employs” if one of the three conditions are met: (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’s Decision

On April 2018, the California Supreme Court held that the “control” test developed in S.G. Borello was not the exclusive standard, and that the definition of “employ” developed in Martinez was applicable.  The Court further held that the “suffer or permit to work” definition in Martinez is a term of art and is determined by the “ABC” test utilized in other jurisdictions. Under a generalized overview, the ABC test declares that a worker is an independent contractor rather than an employee under the “suffer or permit to work” element of the Martinez test if all three of the following apply:

1. The individual (worker) is not under the direction of the hirer in the performance of his or her work;
2. The individual completes work that was not designated by the hiring company; and
3. The individual is engaged in an independently established trade.

Implications of the Ruling

The ABC test has set forth the standard to determine whether a worker should or should not be considered an employee under the “suffer or permit to work” definition of “employ” developed in Martinez. The decision in Dynamex may have a significant impact on many California employers.

The Dynamex court provided the following examples of this impact:

(1) On the one hand, a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee. Dynamex, 4 Cal.5th at 37.

(2) On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees…. the workers’ role within the hiring entity’s usual business operations is more like that of an employee than that of an independent contractor. Dynamex, 4 Cal.5th at 37.

Assembly Bill 5: Codifying Dynamex and Clarifying its Application

On September 2019, Governor Newsom signed into legislation Assembly Bill 5, thus expanding and codifying the state’s Supreme Court decision in the Dynamex case and the subsequent “ABC test” that assists in determining if a worker should be classified as an independent contractor or an employee.  To no surprise, AB5 has already been challenged in the California Courts and Federal Courts. For instance, in early January of 2020, a California Superior Court judge ruled that AB5 and Dynamex was inapplicable to truck drivers, and a Federal judge issued a preliminary injunction to temporarily stop enforcement against motor-carriers.

Assembly Bill 5 expands Dynamex’ ABC test, establishes exemptions, and also creates new methods of enforcement:

• The ABC test will apply to more claims – Starting January 2020, the ABC test will be utilized to discern whether a worker who is providing services should be regarded as an employee for the purposes highlighted under California’s Unemployment Insurance Code, Labor Code, and California Wage Orders.

Consequently, workers arguing that they have been misclassified as independent contractors will be able to use the test to make the claim that they are in fact an employee and are therefore entitled to file claims such as: (a) the lack of reimbursing required business expenses, under Labor Code §2802; (b) the lack of providing complete and accurate wage statements, under Labor Code §226; (c) the lack of paying unemployment insurance tax; (d) and, the lack of providing workers’ compensation insurance coverage.

AB 5 will not expand the ABC test to claims under the state’s Government Code, which serves to protect employees against discrimination and harassment in the workplace. Moreover, the test will also not be expanded to tort claims.

• Assembly Bill 5 Enforcement – The state’s Attorney General as well as certain municipal attorneys will have the power to pursue necessary injunctions against employers that are suspected of misclassifying their workers. Along with this is the ability to base PAGA actions claims on violations against the Labor Code, which will circumvent certain employee arbitration or class action waiver arrangements when PAGA claims are brought forth.
• Assembly Bill 5 Exemptions – There are multiple occupations that are carved out of the ABC test. Under these occupations, Borello’s multi-factor test will apply to determine whether a person should be classified as an employee. Although subject to licensing or other requirements, the following is a list of general exemptions provided under AB 5: (a) doctors, such as physicians, dentists, surgeons, veterinarians, podiatrists, or psychologists; (b) professionals, such as architects, lawyers, or engineers; (c) professional services, such as human resources administrators, marketing, travel agents, grant writers, graphic designers, or fine artists; (d) Financial services, such as securities broker dealers, accountants, or investment advisors; (e) real estate agents; (f) insurance brokers; (g) builders and contractors; (h) direct sales, the compensation is based upon actual sales, not referrals or wholesale purchases; (i) photographers and freelance writers, when contributing to an outlet no more than 35 times a year (j) when licensed, electrologists, manicurists, and estheticians; (k) when licensed and can set own schedule or rates, barbers and hairstylists; (l) tow truck drivers affiliated with AAA; (m) commercial fishermen; and (n) tutors who teach their own curriculum and are also not tutoring for public schools.

It is not entirely clear how AB 5’s retroactivity will be enforced. The bill proclaims that certain Labor Code provisions will apply on a retroactive basis to already existing claims or actions to what is permitted by the law. Meanwhile, other provisions will be applicable to work that is performed on or post January 1st, 2020.

The test will apply retroactively with respect to wage orders under the Industrial Welfare Commission and/or violations of the California Labor Code, when relating to wage orders.

Starting January 1st, 2020, however, the test will apply under the California Unemployment Insurance Code and the other provisions will work under the Labor Code as opposed to the wage orders. As of July 1st, 2020, the ABC test along with Dynamex will apply for the purpose of workers’ compensation.

 Seek Legal Representation

If your company has, or is considering, re-establishing roles and guideline classifications for your workers, consider speaking to an attorney with the right experience. A well-experienced attorney will understand the law and impact of classification of workers and the recent decision of the California Supreme Court in Dynamex. Further, it is important that the attorney you seek follows this ruling closely as there are several elements that can still continue to change.

The attorneys at Knez Law Group are experienced in the field of employment defense law. They are dedicated to seeking the protection of their clients when they have received claims or suits from individuals who claimed to have been wronged by the employers or companies they work for.