The California Supreme Court’s April 30 ruling in Dynamex v. Superior Court is being described as a “game-changer,” “seismic shift,” and “a case that could have wide ramifications” for businesses relying on independent contractors. Those operating in the “gig” or “shared” economy, such as ridesharing apps and delivery services, will likely feel the largest impacts simply because of the number of independent contractors they utilize. However, the court’s decision in favor of independent contractors seeking employee status from the company, Dynamex, presents vulnerabilities that all owners, solopreneurs, and even aspiring entrepreneurs must consider.
At A Glance: Case Background and Court Decision
Dynamex is a Dallas-based retail delivery provider that previously classified its delivery drivers as employees up until 2004, when the company reclassified drivers as independent contractors and began requiring them to provide their own vehicles and cover expenses. A group of 1,800 Dynamex drivers, led by a driver named Charles Lee, filed a lawsuit in 2005 in the case, Lee v. Dynamex, stating their responsibilities and expectations from management had remained constant, but their liabilities had increased, from when they were classified as employees. Lee argued that Dynamex was engaging in unlawful business practices and failing to comply with Labor Code requirements.
More than a decade after the case was originally filed, the California Supreme Court ruled in favor of the drivers on a narrow but important issue in the case, despite their having explicitly entered written independent contractor agreements with Dynamex. Why?
The ABC Test
“Individual workers generally possess less bargaining power than a hiring business and may face pressure to accept work for substandard pay and working conditions,” Chief Justice Tani Cantil-Sakauye said in the unanimous decision, according to the San Francisco Chronicle.
Dynamex v. Superior Court is a landmark case that is redefining the way California businesses will differentiate employees from independent contractors through a newly adopted “ABC Test.” The three-pronged test stems from a similar test used in Massachusetts and New Jersey, and states that a worker is properly classified as an independent contractor if it has been established by the company:
- That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
- That the worker performs work that is outside the usual course of the hiring entity’s business; and
- That 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.
All three parts of the ABC Test must be met in order for independent contractor classification to be deemed accurate and lawful. In Dynamex, the Supreme Court concluded that the “B” and “C” qualifications had not been met by the company because common proof existed that (“B”) the work of the drivers was part of the company’s core business and (“C”) the drivers worked only for Dynamex and did not have employees of their own.
Items “B” and “C” in the ABC Test did not previously exist in California’s decades-old Borello test previously used to determine employment status based on “right to control.” Moreover, the ruling places the burden on the business to prove each element and the worker does not have any say in the matter. If the business cannot pass the ABC Test, the worker is an employee, even if the worker were to otherwise choose to be treated as an independent contractor.
The Supreme Court’s decision is a clear statement that the State of California is seeking to confine independent contractor status to traditional contractor roles, such as professional service providers. It is considered a big win for gig workers, who will now receive more protection under California’s wage laws.
Consult a Business Attorney
Certain exemptions, such as the professional exemption included in the state’s Wage Orders, remain in effect, providing some business owners with the continuing opportunity to utilize independent contractors even if they do not meet the requirements of the ABC Test. As a law firm committed to supporting small and medium-sized businesses in California, the attorneys at Gehres Law Library are closely monitoring the developments and impact of the Dynamex decision, and advise all businesses who are unsure of the effect of this ruling on their business model to contact us for an employee classification evaluation.