Employees vs. Independent Contractors: Battle Continues Over Classification in California

Lawsuits against companies accused of misclassifying workers as independent contractors are on the rise in the wake of last year’s landmark California Supreme Court decision, Dynamex v. Superior Court, which announced a new strict standard (the “ABC test”) for determining if a worker is an employee or independent contractor. In fact, since that decision, companies have paid millions of dollars in judgments and settlements after finding themselves on the receiving end of class action lawsuits brought by groups of workers who allege they were improperly classified, and as a result, were deprived of the benefits and protections afforded employees under California labor laws. Late last year, a California appellate court reaffirmed that the new “ABC test” applies to the basic obligations defined by the California Wage Orders and not to all employee benefits and protections. Also, two competing bills addressing Dynamex are currently pending before the California Legislature, and it is expected that negotiations surrounding these bills will dominate the 2019 Legislative Session.

Under the new “ABC test,” adopted by the California Supreme Court in Dynamex, all California workers are presumed to be employees. A worker may be classified as an independent contractor only when the company hiring the worker can prove each of the following conditions:

1. 1. That the worker is free from the control and direction of the hiring company in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
   2. That the worker performs work that is outside the usual course of the hiring company’s business; and
   3. That the worker is customarily engaged in an independently established trade.

The hiring company has the burden of establishing all three of these conditions, and if it is unable to establish any one condition, the worker is classified as an employee.

Late last year, a California appellate court held that the Dynamex “ABC test” only applies to the rights and obligations identified in the California Wage Orders that require employers to comply with labor laws governing basic minimum working conditions such as minimum wage, maximum hours worked, overtime, rest and meal periods, wage statements, etc. Other labor laws such as the requirement that an employer reimburses employees for work-related expenses, employee leaves of absence, paid family leave, and workers compensation are outside the Wage Orders. Thus, the appellate court in Garcia v. Border Transportation Group held that the Dynamex “ABC test” applied to obligations defined by the California Wage Orders, but the pre-Dynamex, multi-factor test that focuses on whether the hiring company had the “right to control” applies to obligations that are defined outside of the Wage Orders.

Moreover, recognizing that the Dynamex decision is potentially devastating to gig economy companies such as Uber, Lyft, DoorDash, etc. and to many other industries including real estate, the business community is lobbying the California Legislature to address the fallout from Dynamex. Currently, there is competing legislation pending in Sacramento relating to Dynamex. One bill, supported by labor, seeks to codify Dynamex, while a second bill, supported by business organizations including the California Chamber of Commerce, seeks to revert to the pre-Dynamex multi-factor test that focuses on whether the hiring company had the “right to control” to determine independent contractor status. The result, after significant negotiations that are on-going, may be a compromise between these two positions. However, unless and until such a compromise is reached, the Dynamex “ABC test” continues to be the law of the land. Stay tuned as this issue will continue to be front and center in the 2019 California Legislative year.

For more information, please contact Jennifer Morin.