Employment Law Daily California’s new ‘ABC test’ expands definition of employee under state wage orders
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Wednesday, May 2, 2018

California’s new ‘ABC test’ expands definition of employee under state wage orders

By Kathleen Kapusta, J.D.

Under both California and federal law, whether an individual should properly be classified as an employee or an independent contractor has considerable significance for workers, businesses, and the public, the California Supreme Court observed in a highly anticipated—and lengthy—decision in which it found the trial court did not err in concluding that the “suffer or permit to work” definition of “employ” contained in the state wage order applicable to the transportation industry may be relied upon in evaluating whether a worker is an employee or an independent contractor for purposes of the wage order’s obligations. Further, the wage order’s suffer or permit to work definition must be interpreted broadly to treat as “employees,” and thereby provide the wage order’s protection to, all workers who would ordinarily be viewed as working in the hiring business, said the court. The suffer or permit to work definition “is a term of art that cannot be interpreted literally in a manner that would encompass within the employee category the type of individual workers, like independent plumbers or electricians, who have traditionally been viewed as genuine independent contractors who are working only in their own independent business” (Dynamex Operations West, Inc., April 30, 2018, Cantil-Sakauye, T.).

Underlying lawsuit. In the underlying lawsuit, two individual delivery drivers suing on their own behalf and on behalf of a class of allegedly similarly situated drivers filed a complaint against Dynamex, a nationwide package and document delivery company, alleging it misclassified its delivery drivers as independent contractors. This alleged misclassification, they claimed, led to Dynamex’s violation of the provisions of Industrial Welfare Commission wage order No. 9, the applicable wage order governing the transportation industry, as well as various sections of the Labor Code, and as a result, Dynamex had engaged in unfair and unlawful business practices under Business and Professions Code section 17200.

Class action certified. Prior to 2004, Dynamex classified as employees drivers who allegedly performed similar pickup and delivery work as the current drivers perform. In 2004, however, it adopted a new policy and contractual arrangement under which all drivers are considered independent contractors. The trial court ultimately certified a class action embodying a class of Dynamex drivers who, during a pay period, did not themselves employ other drivers and did not do delivery work for other delivery businesses or for the drivers’ own personal customers. In finding that the relevant common legal and factual issues relating to the proper classification of the drivers predominated over potential individual issues, the trial court’s certification order relied upon the three alternative definitions of “employ” and “employer” set forth in the applicable wage order as discussed in the state high court’s 2010 opinion in Martinez v. Combs.

The Martinez court had held that held that “[t]o employ… under the [wage order], has three alternative definitions. It means: (a) to exercise control over the wages, hours, or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.” The trial court rejected Dynamex’s contention that in the wage order context, as in most other contexts, the multifactor standard set forth in the state supreme court’s seminal decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations was is the only appropriate standard under California law for distinguishing employees and independent contractors.

Court of Appeal. In response to the trial court’s denial of Dynamex’s subsequent motion to decertify the class, the company filed a writ proceeding in the Court of Appeal, maintaining that two of the alternative wage order definitions of “employ” relied upon by the trial court did not apply to the employee or independent contractor issue. The state appeals court found the wage order definitions discussed in Martinez are applicable to the employee or independent contractor question as to obligations arising out of the wage order. It upheld the trial court’s class certification order for all of plaintiffs’ claims based on alleged violations of the wage order.

However, it also found that insofar as the causes of action in the complaint sought reimbursement for business expenses, such as fuel and tolls not governed by the wage order and obtainable only under section 2802 of the Labor Code, the Borello standard was the applicable standard for determining whether a worker is properly considered an employee or an independent contractor. As to the plaintiffs’ non-wage-order claim under section 2802, the appeals court remanded for the trial court to reconsider its class certification of that claim pursuant to a proper application of the Borello standard under Ayala v. Antelope Valley Newspapers, Inc.

What definitions apply? Dynamex then petitioned for review, challenging only the conclusion that the wage order definitions of “employ” and “employer” discussed in Martinez are applicable to the question whether a worker is properly considered an employee or an independent contractor for purposes of the obligations imposed by an applicable wage order.

California judicial decisions. On appeal, the California Supreme Court extensively reviewed the most relevant California judicial decisions, noting that prior to Borello, California decisions generally invoked the common law “control of details” standard and also considered a number of “secondary factors that could be properly considered in determining whether a worker was an employee or independent contractor. In Borello, the court held that in determining employee or independent contractor status with deference to the remedial statute at issue, it is permissible to consider all of the various factors set forth in prior California cases, in Labor Code section 2750.5, and in the out-of-state cases adopting a six-factor test.

Borello. Borello, observed the court, emphasized statutory purpose as the touchstone for deciding whether a particular category of workers should be considered employees rather than independent contractors. This emphasis set the Borello test apart from the standard embraced in more recent federal cases, which apply a more traditional common law test for distinguishing between employees and independent contractors. While the Martinez court did not directly involve whether workers were employees or independent contractors, it addressed the meaning of the terms “employ” and “employer” as used in California wage orders, observed the court here, noting that “the proper scope of the Martinez decision lies at the heart of the issue before our court in the present case.”

Martinez. The Martinez court concluded that the definitions of the employment relationship contained in an applicable wage order apply in a civil action brought by a worker under section 1194, and that the applicable wage order sets forth three alternative definitions of employment for purposes of the wage order: “(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.”

Ayala. In the present case, said the court, “we take up the issue we did not reach in Ayala,” decided four years after Martinez, “namely whether in a wage and hour class action alleging that the plaintiffs have been misclassified as independent contractors … a class may be certified based on the wage order definitions of ‘employ’ and ‘employer’ as construed in Martinez, or, instead, whether the test for distinguishing between employees and independent contractors discussed in Borello, is the only standard that applies in this setting.”

Suffer or permit to work. While Dynamex argued that two of the three alternative definitions identified in Martinez—the exercise control over wages, hours, or working conditions standard and the suffer or permit to work standard—were applicable only in determining whether an entity is a joint employer of the workers, the court found no need to determine whether the exercise control over wages, hours, or working conditions definition was intended to apply outside the joint employer context. Rather it concluded that the suffer or permit to work standard properly applies to whether a worker should be considered an employee or an independent contractor. Under the suffer or permit to work standard, the trial court’s class certification order at issue here should be upheld.

The court rejected Dynamex’s contention that the standard should be understood as applicable only to the joint employer question, finding nothing in the language of the wage order indicating that the standard is so limited. Moreover, the origin and history of the suffer or permit to work language in Martinez made it quite clear this standard was intended to apply beyond the joint employer context. And while Dynamex also argued that since the Borello decision was handed down, California decisions have applied that standard in distinguishing employees from independent contractors in many contexts, including in cases arising under California’s wage orders, the court found that the lack of prior case support did not distinguish the employee/independent contractor context from the joint employer context at issue in Martinez.

Suffer or permit is not too broad a sweep. As to Dynamex’s assertion that the Martinez decision itself indicates the Borello standard applies in the wage order context to distinguish independent contractors from employees, the court found the passage at issue in Martinez makes it quite clear the court was not deciding whether the Borello standard was the only applicable standard for determining whether a worker is an employee or independent contractor under a wage order. Finally, the court rejected the assertion that the suffer or permit to work standard cannot serve as the test for distinguishing employees from independent contractors because a literal application of that standard would characterize all individual workers who directly provide services to a business as employees.

The standard is relevant and significant in assessing the scope of the category of workers that the wage order was intended to protect, said the court, noting that it was proposed and adopted in 1937 as part of the FLSA. Federal courts, in applying the suffer or permit to work standard set forth in the FLSA, have recognized that it was intended to be broader and more inclusive than the preexisting common law test, but at the same time does not purport to render every individual worker an employee.

ABC test. A multifactor standard — like the economic reality standard or the Borello standard—that calls for consideration of all potentially relevant factual distinctions in different employment arrangements on a case-by-case, totality-of-the-circumstances basis has several disadvantages, including that it makes it difficult for both hiring businesses and workers to determine in advance how a particular category of workers will be classified, said the court. Noting that a number of jurisdictions have adopted a simpler, more structured test for distinguishing between employees and independent contractors—the so-called “ABC” test—the court observed that this minimizes the disadvantages.

Accordingly, the court found it appropriate and consistent with the history and purpose of the suffer or permit to work standard to interpret that standard as: (1) placing the burden on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the wage order’s coverage; and (2) requiring the hiring entity, in order to meet this burden, to establish each of the three factors embodied in the ABC test — namely (A) that the worker 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) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Burden on hiring entity. After discussing each part of the ABC test and its relationship to the suffer or permit to work definition, the court concluded that unless the hiring entity establishes each part of the ABC test it set forth, the worker should be considered an employee and the hiring business an employer under the suffer or permit to work standard in wage orders. The hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of the wage order.

Application of standard. Applying the suffer or permit to work standard to this case, the court found that while the trial court’s view of the standard was too broad, under a proper interpretation of it, the court’s ultimate determination that there was a sufficient commonality of interest to support certification of the proposed class was correct and should be upheld. First, it was clear that there was a sufficient commonality of interest on whether the work provided by the delivery drivers within the certified class was outside the usual course of the hiring entity’s business to permit the plaintiffs’ claim of misclassification to be resolved on a class basis. Second, it was equally clear that there was a sufficient commonality of interest as to whether the drivers in the certified class were customarily engaged in an independently established trade, occupation, or business to permit resolution of that issue on a class basis.

Accordingly, the court found that under a proper understanding of the suffer or permit to work standard there was, as a matter of law, a sufficient commonality of interest within the certified class to permit litigation on a class basis on the issue of whether the drivers are employees or independent contractors for purposes of the wage order. As to the causes of action based on alleged violations of the obligations imposed by the wage order, the trial court did not abuse its discretion in certifying the class and in denying Dynamex’s motion to decertify the class.

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