On April 30, 2018, the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court (Case No. S222732) handed down an opinion that calls into question the continued viability of the gig economy due to tighter restrictions that will necessarily limit the number of workers who can be properly classified as  independent contractors.  This decision is a devastating blow to employers throughout California, who were no doubt buoyed by the recent favorable decision on independent contractors in the Lawson v. Grubhub, Inc. (Grubhub) case.  In Grubhub, a California federal district court found Grubhub’s delivery drivers to be independent contractors under the multifactor test articulated in the 1989 California Supreme Court ruling known as S.G. Borello & Sons, Inc. v. Department of Industrial Relations (Borello). 

Dating back to the Borello decision in 1989, businesses have structured their operations and made important worker classification decisions based on the right to control the “manner and means” of the work performed.  This analysis involved a consideration of the following eight factors, none of which were dispositive: (1) the worker’s distinct occupation; (2) whether the work was performed under supervision; (3) the skill required to perform the service; (4) whether the worker provided the tools and instrumentalities required; (5) the length of performance; (6) method of payment; (7) whether the work was performed as part of the company’s regular business; and (8) the parties’ intent.

The Dynamex decision dramatically changed this analysis by rejecting the Borello test in favor of a three-factor, disjunctive “ABC” test to determine if an individual should be considered an employee, as opposed to an independent contractor, for purpose of complying with California’s wage orders (minimum wage, meal and rest breaks, etc.).  The Dynamex court said this new test would hopefully reduce the difficulty and uncertainty in applying the Borello test, in addition to limiting employers’ “ability to evade responsibility” under the wage orders through carefully crafted policies.

The ABC test (which is utilized in Massachusetts and New Jersey) sets forth three factors, each of which the hiring entity must establish, to prove the worker is an independent contractor.  Failure to prove just one of the factors is dispositive of an employer-employee relationship.

Factor A:        Is the Worker Free From Control and Direction of the Hiring Entity in Connection with the Performance of the Work, Both under the Contract for Performance of the Work and in Fact?

To satisfy this factor, the hiring entity “must establish that the worker is free of” control normally possessed over its employees.  As acknowledged by the Dynamex court, this factor closely mirrors the hiring entity’s right to control the “manner and means” of the work as outlined in the Borello test.

The Dynamex court provided several examples from other jurisdictions employing the ABC test to guide employers.

• A company that designed and sold children’s clothing failed to prove that at-home knitters who were provided the designs and materials by the company were sufficiently free from the company’s control under Part A of the ABC test.  The fact that the knitters worked at home, on their own machines, at their own pace, and on days and times of their choosing was insufficient.
• Trucking company failed to prove Part A of the ABC test because it required drivers to keep their truck clean, obtain company permission before transporting passengers, report to the company dispatch center to obtain assignments not scheduled in advance, and could terminate drivers for tardiness, failure to contact the dispatch center, or any violation of company policy.
• Construction company proved part A of the ABC test where worker set his own schedule, worked without supervision, purchased all materials with his own business credit card, and declined offer of employment so he could control his own activities.

Factor B:        Does the Worker Perform Work That is Outside the Usual Course of the Hiring Entity’s Business? 

If an individual is reasonably viewed as providing services to the business in a role comparable to that of an employee, the hiring entity will be unable to prove this factor.  Crucial here is whether the individual is providing services which are  within the usual course of the hiring entity’s operations.  For example, when a retail store hires an outside electrician or plumber to perform work, the services are not part of the store’s normal operations.  On the other hand, when a clothing manufacturing company hires at-home seamstresses to make clothing, or when a bakery hires cake decorators to work on its custom-designed cakes on a regular basis, the workers are considered part of the business entity’s normal operations.

Prior classification of the position as an employee-position, rather than an independent contractor, also strongly indicates the position is an employee-position. 

Factor C:        Is the Worker Customarily Engaged in An Independently Established Trade, Occupation, or Business of the Same Nature as the Work Performed for the Hiring Entity?

This factor focuses on whether the worker has independently made the decision to go into business for himself or herself.  A hiring entity can make this showing by putting forth evidence that the individual has taken steps to establish and promote their individual business including, but not limited to, incorporation, licensure, advertisements, routine offerings to provide services to the public or potential customers, business cards, business phones, business locations or receiving income from another party other than the hiring entity.

The fact that a company has not prohibited or prevented a worker from engaging in other business is not sufficient to establish that the worker has independently made the decision to go into business for himself or herself.

The Dynamex case leaves open whether the Borello test remains viable for claims brought outside the context of California’s wage orders, especially claims for reimbursement of business expenses under Labor Code section 2802.

Next Steps: If you operate in California and utilize independent contractors in any facet of your operations, you should review the propriety of this practice with legal counsel in light of Dynamex and understand that going forward a business will only be able to classify workers as independent contractors under extremely narrow circumstances.  Failure to properly classify workers may result in costly, often class-wide, litigation.