Continuing its trend towards limiting the rights of California employers, the California Supreme Court issued a ruling earlier this week which effectively makes it impossible for employers to correctly classify workers as independent contractors instead of employees. In Dynamex Operations West, Inc. v. Superior Court, the Court considered the question of who qualifies as an employee and who qualifies as an independent contractor for purposes of the California Wage Orders, and ultimately adopted the “ABC” test (spoiler alert: its not very friendly to employers).

Dynamex, a nation-wide same-day courier and delivery service, had previously classified its drivers as employees. However, in 2004, the company made a decision to convert all of its truck drivers to independent contractors. In 2005, one of Dynamex’s employees filed suit alleging misclassification and a number of causes of action associated with misclassification on behalf of himself and other similarly situated employees. During the class certification process, the parties disagreed about which standard was applicable in determining whether a worker was an employee or independent contractor. Plaintiffs relied on the Supreme Court’s decision in Martinez v. Combs (2010) 49 Cal.4th 35, claiming that the standard set forth therein (to “employ” means (a) to exercise control over the wages, hours or working conditions; (b) to suffer or permit to work; or (c) to engage, thereby creating a common law employment relationship) was the proper standard. Dynamex, on the other hand, argued that Martinez only applied to whether or not hiring entities were joint employers, not whether a worker was an employee or independent contractor, and claimed that the standard set forth in S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 342 (the “right to control the manner and means of accomplishing the result desired”) was the correct and only standard to apply. Ultimately, the Supreme Court agreed with Plaintiffs, determining that the “suffer or permit” standard contained in Martinez was both relevant and significant in assessing the scope of category of workers who qualify as employees and that the wage orders were intended to protect.

In discussing the “suffer or permit” standard, the Court noted that it must be “interpreted and applied broadly to include within the covered ‘employee’ category all individual workers who can reasonably be viewed as ‘working in the [hired entitiy’s] business.’” In clarifying what that means, the Court adopted the ABC test used by other jurisdictions – requiring the employer (not the employee) to carry the burden on proving all three of the following

(A) that the worker is free from 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; and

(B) that the worker performs the 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.

If even one of these factors is missing, the worker does not qualify as an independent contractor, and instead must be considered an employee, subject to California overtime and meal/rest period requirements.

The Court did make it clear that its opinion applied to the question of who qualifies as an employee under California Wage Orders only, not under the Labor Code. Of course, the effect is still very significant to employers since the wage orders control minimum wages, maximum hours/overtime, and meal and rest periods – some of the most commonly asserted claims in employment class actions. Additionally, it seems likely that the plaintiff’s bar will argue that expansion of the ABC test to the definition of “employee” under the Labor Code should follow suit.

Employers who are concerned that they may have hired workers as independent contractors who no longer qualify under this new standard should consult with legal counsel to determine the best course of action.

Laura Wolfe is a partner in McCormick Barstow’s Fresno Office.  She practices Civil Litigation with an emphasis in Labor and Employment Litigation and Consulting.  Ms. Wolfe can be reached at 559-433-1300.