History and applications of California’s new hard-fought employment test.
The following is an article by Kevin Osborne and co-author Katie Rabago, of Santa Clara Law School, published in the Jan/Feb 2020 Issue of Forum Magazine, a publication of the Consumer Advocates of California.
“The misclassification of workers as independent contractors has been a significant factor in the erosion of the middle class and the rise in income inequality.”
(2019 California Assembly Bill No. 5, § 1, subd. (c).)
This bold language comes from California’s 2019 blockbuster labor law, AB 5. This law signed by the Governor September 18th, stands on the shoulders of a similarly bold 2018 Supreme Court ruling, Dynamex Operations West, Inc. v. Super Court (2018) 4 Cal.5th 903.
Dynamex reminded Californians that our labor laws are not only intended to benefit workers and their families. They benefit California’s employers by “ensuring that [...] responsible companies are not hurt by unfair competition from competitor businesses that utilize substandard employment practices.” (Id., at p. 952.) These laws also serve the public at large, which “will often be left to assume responsibility for the ill effects to workers and their families resulting from substandard wages or unhealthy and unsafe working conditions.” (Id.)
Independent contractor misclassification has been at the center of the fight for workers’ rights for decades. Classifying a worker as an independent contractor is not illegal. But classifying a worker who is rightfully an employee as an independent contractor to avoid the costs and responsibilities of the employment relationship steals from workers, enriches cheaters, and costs us all in the currency of the greater good.
What determines whether an employer is misclassifying a worker? This was a settled question for much of the last 30 years. The California Supreme Court changed the answer to this question when it issued its ruling in Dynamex in 2018. In 2019, the Ninth Circuit Court of Appeals and the California legislature ratified the ruling in Dynamex.
The Foundations of Dynamex: Borello and Martinez
The most influential California Supreme Court case on this issue for the last three decades was S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341. Justice Eagleson’s opinion in that case established a two-component analysis involving a “primary test” and a series of “secondary considerations.”
The primary test examined whether the hirer had the right to control the manner and means of accomplishing the desired result. The secondary considerations, a non-exhaustive list intended to provide guidance, included inquiries such as whether the one performing work was engaged in a distinct occupation or business, the kind of occupation and whether the work was usually done under another’s direction, and whether the work was a part of the regular business of the principal.
Since 1989, this 2-tier test was the primary inquiry in California used to analyze whether a worker was an independent contractor or an employee.
In 2010, the California Supreme Court created a corollary to Borello. The case of Martinez v. Combs (2010) 49 Cal.4th 35 was not about independent contractor misclassification. It was about the different but related issue of joint employment. The joint employment situation often arises when one company outsources its labor needs to another company.
Justice Werdegar’s opinion in Martinez analyzed the facts under the statutory framework of the Industrial Welfare Commission’s Wage Orders and ruled California law affords three alternative definitions of an “employer”:
One who controls a worker’s wages, hours, or working conditions (including hiring, firing, and supervising the work);
One who “suffers or permits” the work, including having knowledge of the violation of the worker’s rights and failing to prevent it; and
One who “engages” the worker, thereby creating a common law employment relationship.
The factors analyzed in the Martinez test and those of the Borello test overlapped, but there were important differences. Borello considered the subjective belief of the parties regarding their relationship. The secondary considerations of Borello also gave repeated consideration to the nature of the occupation in question. Martinez, meanwhile, ignored what the parties believed and relied only limited factual and circumstantial tests. Martinez also included a number of factors absent from the Borello test, like the consideration of control over work hours or wages.
It was often thought that a court analyzing a plaintiff worker’s status under Martinez would be more likely to find employee status than a court analyzing the same case under Borello. This was the strategy of the plaintiffs in the Dynamex case. There, the independent contractor plaintiffs alleged they were actually employees and had been misclassified, but cleverly argued the court should apply the Martinez joint employer test. The Supreme Court ultimately agreed … sort of.
New Jersey, Dynamex, and AB 5
After the state court of appeal gave its ruling in the Dynamex case in October 2014, the Supreme Court took the case up. During consideration, the Supreme Court requested the parties provide briefing on the New Jersey State Supreme Court’s analysis of the definition of the “suffer or permit” concept used in the Martinez case.
In 2015, the New Jersey Court ruled in Hargrove v. Sleepy's, LLC (2015) 220 N.J. 289 that the proper analysis of the “suffer or permit” standard was what came to be known as the “ABC” test. Under that test, a person providing labor or services for remuneration is presumed an employee unless the employer shows all of the following conditions are satisfied:
(A) The person 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;
(B) The person performs work that is outside the usual course of the hiring entity’s business; and
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The ultimate ruling in Dynamex, issued in April 2018, adopted this test for its analysis. Overnight, this became the new test for independent contractor misclassification claims in California. But the opinion was self-limiting. Repeatedly, the opinion stated it only applied to claims arising under the state’s Wage Orders. So while Dynamex was a meaningful win for workers, there was a glitch in its logic.
In theory, a worker bringing claims under the Wage Orders, like minimum wage or meal break claims, would have her employment status analyzed under the ABC test. Meanwhile, another worker who did the same work for the same employer bringing claims outside the Wage Orders, like work-related expense reimbursement claims, would have her claims analyzed under a different standard, probably Borello. Thus, the same worker, working under the same circumstances, for the same company, could be considered an employee if she claimed Wage Order violations but an independent contractor if she claimed other violations.
This inconsistency was recognized and addressed by the legislature with AB 5, or the “Worker Status Bill.” Among other things, AB 5 adds section 2750.3 to the Labor Code, which addresses the potential inconsistency created by Dynamex and makes the ABC test applicable to all claims for employment status, regardless of whether the Wage Orders are implicated.
What does a practitioner do with this new test? The following are some potential applications.
Application No. 1: Retroactive Application of Dynamex and AB 5
In Vazquez v. Jan-Pro Franchising International, Inc. (9th Cir. 2019) 923 F.3d 575, the Ninth Circuit held Dynamex applies retroactively under state Wage Orders. That means existing cases for claims under Wage Orders, even those filed before the Supreme Court’s ruling in Dynamex, are analyzed under the ABC test.
What about cases not involving allegations for Wage Order violations? Early versions of AB 5 did not address retroactive liability. On August 30, 2019, legislators added language to apply specific provisions of the bill retroactively “to the maximum extent permitted by law.” The language of the law itself, however, does not make clear that its application extends to all non-Wage Order claims retroactively.
Application No. 2: Application to Franchises
A key application of Dynamex and AB 5 will be for claims involving franchises. Historically, franchisors have insisted they are entitled to special protections under California law. The Ninth Circuit’s application of Dynamex in Vazquez, mentioned above, makes it clear that the ABC test will be applied to franchisors.
In Vazquez, the test was applied to janitorial service workers the franchisor claimed were contractors. But a litany of companies use the franchise model in what is essentially independent contractor misclassification under the ABC test, including restaurants, auto mechanics, hotels, and gyms.
Application No. 3: Revisiting Joint Employment Cases
Dynamex was ultimately decided by applying a the “suffer or permit” factor from the Martinez decision, which was a joint employer case. In holding that the “suffer or permit” standard includes the ABC test, joint employer liability would, in theory, be open to a wider interpretation.
One appellate court decision has already found the ABC test should not apply to joint employer liability cases. Henderson v. Equilon Enterprises, LLC (2019) 40 Cal.App.5th 1111 ruled that, Dynamex was intended to address policy concerns relating to independent contractor misclassification. Joint employer cases necessarily involve plaintiffs who are already admitted employees, so the ABC test should not apply. Hernderson notwithstanding, there may be joint employer cases where the ABC test should be considered.
One example involves big box retailers. These companies frequently use subcontractors to deliver or install their products. The subcontractors, however, are fast and loose with labor laws. If evidence shows a contractor is simply an extension of a retailer’s operation, it would stand to reason that the worker-friendly ABC test should apply.
Impact on Workers, Employers and Litigation
In today’s California, misclassified workers can come forward to protect their rights in greater force than ever. Looking ahead, the Dynamex decision and AB 5 will do more to protect California’s workers than any law since the 2004 Private Attorneys General Act, which created myriad new private rights of action. Furthermore, entire segments of the workforce will likely be reclassified as employees and will enjoy health benefits, workers’ compensation, unemployment compensation, etc.
Employers who play by the rules will also benefit, as fewer misclassification schemes that unfairly advantage cheaters will withstand scrutiny under the ABC test. Those employers looking for ways to continue independent contractor subterfuges should be aware that it is not just private plaintiffs that may bring an actions for relief. Under AB 5, the state Attorney General or a city attorney may also bring actions for injunctive relief given certain circumstances exist.
As more people become aware of the new law and workers begin to understand their rights, we will, of course, see more lawsuits. AB 5 does not automatically re-classify workers as employees. Thus, it is the responsibility of workers’ rights advocates to use the expanded definition of an employee to protect California workers.