Major Supreme Court Decision to Have Significant Effects on the Gig Economy

The California Supreme Court has issued a decision that will have far reaching implications on how workers may be classified in the gig economy.

In Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court clarified that a new test should be applied to how to classify workers in California —as either independent contractors or employees—for the purposes of California Wage Orders. Wage orders are regulations promulgated by the state’s Industrial Welfare Commission that detail employer obligations relative to minimum wage, maximum working hours, and meal and rest breaks that only apply to employees.

The Wage Order at issue involves workers in the transportation industry. It defines “employ” as “to engage, suffer, or permit to work”. The California Supreme Court, in a case called Martinez v. Combs (2010), previously interpreted this definition of “employ” to mean: (1) to exercise control over the hours, wages, or workings conditions, (2) to suffer or permit to work, or (3) to engage, thereby creating a common law employment relationship. In Dynamex, the Court identified “to suffer or permit to work” as the appropriate inquiry for the independent contractor vs. employee analysis under the wage orders and held that “suffer or permit to work” requires a new test—the “ABC” test.

What is the “ABC” Test?
Under the “ABC” test, all workers are presumptively considered to be employees; classification as an independent contractor is only permitted where each of three factors are satisfied:

1. the worker is free from the control or direction of the employer in the performance of work, both under contract and in practice; and
2. the worker performs work outside the usual course of the employer’s business; and
3. the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The hiring entity has the burden of establishing these three factors. Factors B and C, in particular will likely make it much more difficult for employers to classify workers as independent contractors.

Factor B: The Court offered the following example for clarity on Factor B: When a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an 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, therefore, these workers meet the Factor B for independent contractor classification. Contrast this example with scenarios where 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 a bakery hires a cake decorator to work on custom-designed cakes. For these scenarios, Factor B is not met. Dynamex fits into the latter examples: it is a package delivery business and the plaintiffs were drivers, a core element of Dynamex’s business.

Factor C: The Court also elaborated on what a “worker [that] is customarily engaged in an independently established trade…” looks like. A worker meeting Factor C “generally takes the usual steps to establish and promote his or her independent business—for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.” Under this factor, a gig economy worker for Lyft, Uber, or Post-Mates, looks very different from the licensed plumbing contractor hired by a retail store to fix a leak.

Where Did the “ABC” Test Originate?

The “ABC” test originated outside of California and varies from jurisdiction to jurisdiction. As the Court noted, the California “ABC” test tracks the test currently applied in Massachusetts, which permits the hiring entity to satisfy Factor B only if it establishes that the work performed is outside of the entity’s usual course of business. Compare the Massachusetts test to New Jersey’s, which requires the hiring entity to establish that (1) the work performed is outside of the usual course of business for which the work is performed, OR (2) that the work performed is outside all the places of business of the hiring entity. The Court determined that an “ABC” test that tracks Massachusetts’ test is consistent with “contemporary work practices” as well as the “intended broad reach” of the California wage orders.

What Should Employers Do?

This is a seismic decision that will no doubt have a major impact on the gig economy in California with national implications. A recent article in the Los Angeles Business Journal observed that there is a major data gap of approximately 500,000 jobs between official jobs reports and separately conducted employer surveys. Therefore, there could be half a million workers impacted by this decision. Although the text of Dynamex limits this decision to the classification of workers under wage orders, it remains to be seen what the decision’s application will be outside of the wage order context. (e.g., claims for reimbursement for business expenses that arise from California Labor Code section 2802). Employers who hire independent contractors should immediately assess their hiring practices in light of the “ABC” testoutlined in Dynamex in order to properly classify their workers. Additionally, they should stay tuned for follow up litigation that it sure to follow which could narrow or expand the scope of the “ABC” test.

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