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The Dynamex Decision: Will California’s New Ruling On Independent Contractors Apply to Workers’ Compensation?

May 31, 2018

Claims

On April 30, 2018, the California Supreme Court announced an important change in how employers will be required to distinguish between independent consultants and employees, making it harder for workers to fit the criteria to be called an “independent contractor.”1 The court adopted a test similar to the “ABC” test used in Massachusetts, which has been considered the strictest in the country, pulling more and more workers out of the “contractor” bucket and into the “employee” bucket—a change that may affect companies’ bottom lines. However, this test may not apply across the board—the previously-used test may still apply in matters of Workers’ Compensation, which would be a significant distinction for many companies.

First, let’s look at the old rule for determining a worker’s status.  Known as the Borello test, it primarily looked at whether the hiring entity had a “right to control” how services were performed, along with other “secondary” factors, such as whether the worker was engaged in a distinct occupation or business, the skill required in the particular occupation, and whether the worker or the hiring entity supplied the tools used to perform the work and the place where the work was performed. No one factor was determinative, and each case had to be decided on its own particular facts.

Now let’s look at the court’s change and what this means for workers and employers. The new ABC test requires that all three of the following criteria be met for a worker to be considered an independent contractor:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work

(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.

The “A” and “C” factors are similar to the old Borello test.  But the “B” factor is really new and may be hard for businesses to meet. For example, if an electrician comes to an ad agency to install some new light fixtures, that person is performing a job that is outside the company’s normal work, and is an independent contractor. However, if a worker is hired to do some ad hoc graphic design work, that function would fall under work that is normally performed in that agency, meaning that designer could be considered an employee.

So what’s the good news? Well, the new ABC test only applies to what are known as “Wage Orders.” California has 17 different Wage Orders based on industry such as manufacturing, public housekeeping, and transportation, and they contain slightly different rules according to that type of work—from imposing minimum wages, maximum hours, and outlining minimum basic working conditions (such as minimally required meal and rest breaks).  All other laws – including the Workers’ Compensation Act (WCA) – still apply the Borello test to determine a worker’s status.

The petitioner, Dynamex, argued to the California Supreme Court that having two separate tests—one for the Wage Orders and one for other aspects of the Labor Code, including the WCA—would create confusion and be unworkable in practice.  The court rejected this argument, stating that the Wage Order “purposefully adopts its own definition” of who is an employee to create a very broad standard for determining worker status. “to govern application of the wage order’s obligations that is intentionally broader than the standard of employment that would otherwise apply.” Meaning that a person could be considered an employee when using the ABC test, but considered a contractor when using the Borello test. The court went on to state that “any potential inconsistency” would arise from the Wage Order’s broad definition, and that “it is possible under Borello that a worker may properly be considered any employee with reference to one statute but not another.”  Thus, while not explicit, the court appeared to endorse the Borello standard for various aspects of the Labor Code, including the WCA, even as it adopted the broader ABC test for the Wage Orders.

Therefore, for the moment, the court’s language supports the argument that the Borello test remains the proper standard for the WCA. Nonetheless, whether the ABC test should be used for the WCA is likely to be litigated over the next several years as injured workers treated as independent contractors seek to obtain coverage, or the State Fund asserts workers are misclassified. Further, it is very possible that a coalition of groups will seek a legislative fix (or ballot initiative) to remove or modify the new ABC test. Thus, it is far too early to reach any conclusion that the ABC test applies to the WCA.  Rather than being the end of the debate of the proper test for worker status, the court’s Dynamex opinion merely restarts it from the beginning.

1Dynamex Operations West, Inc. v. Superior Court of Los Angeles, No. S222732 (Cal. Sup. Ct. Apr. 30, 2018).

About the Author

William Hays Weissman is a Partner at Littler Mendelson. He focuses his practice on worker status, employment taxes and affirmative action/Office of Federal Contract Compliance Programs (OFCCP) audits. He counsels employers of all sizes, ranging from single-person start-ups looking to hire the first employee to Fortune 100 companies with sophisticated human resource, payroll and in-house legal departments.

Having previously worked for the government and holding both an M.B.A. and Master of Laws (LL.M.) in Taxation, William understands the business and legal perspectives employers need to consider when addressing any employment problem.

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