The California Supreme Court issued a decision on April 30, 2018 in Dynamex Operations West Inc. v. Superior Court which significantly changed the standard for determining independent contractor versus employee status in California. The state’s business community is deeply troubled by this court decision and believes that the Legislature needs to urgently consider a bill to address this case.
As a result of the Dynamex decision, the California Supreme Court made the independent contractor test tougher under the Wage Orders, but potentially inconsistent with other laws (e.g., workers’ compensation, unemployment insurance, taxation). More importantly to the business community, the decision represents the overturning of nearly 30 years of precedent pursuant to the high court’s 1989 decision in SG Borello & Sons v. DIR, which businesses and workers have relied upon for all these years and that provides factors in determining proper classification.
With such a seismic shift in California’s employment law, it is the elected branch of government that should utilize the legislative process to create any new and far-reaching changes to the law, rather than an appellate court decision as was the case in Dynamex. If this decision is allowed to stay in effect, it will have the practical impact of severely limiting the use of independent contractors in the State of California.
The Legislature should adopt a bill in August when it returns from its summer recess in order to “suspend” the Court’s decision for at least a year to allow the Legislature, our elected branch of government, to consider the implications of this case. This will allow the Legislature and Governor, after hearings and due consideration of the implications of such a drastic change in the law, to determine what is the best approach for all Californians.
Dynamex is a classic example of what law school professors often say that “bad facts make bad law.” This decision interpreted Wage Order 12 (concerning the transportation industry) that was issued more than 15 years ago by the now-defunct Industrial Welfare Commission (IWC). At the very least, the Legislature could reinstitute the IWC and have it update the Wage Orders to reflect today’s businesses, such as the gig economy.
While the Borello test and its corresponding factors were fact-intensive, businesses and individual workers have utilized this standard for nearly three decades. The result of the Court’s Dynamex decision is that very few individuals will be classified as an independent contractor in this state under the ABC test articulated in Dynamex, wherein a worker is presumed to be an employee unless the hiring entity establishes each of the three factors utilized in this test.
Under the ABC Test, the worker must (A) be free from the hiring entity’s control and direction over performance of the work, both under the contract and in fact; (B) perform work that is outside the usual course of the hiring entity’s business; and (C) be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. All of the ABC factors must be established or the presumption that the worker is an employee will stand.
In creating this new test and overturning decades of legal precedent and business practices in this state, the Court’s decision raises numerous questions, such as how will a company’s “usual course of business” be defined? Will industry standards play a role in this analysis? How should companies manage compliance in a system that applies different worker classification tests depending on the statute or regulation at issue? Will this case be applied only prospectively or retroactively? Does it apply to other employee versus independent contractor tests, such as those used for workers’ compensation, unemployment insurance, and Cal-OSHA?
Massachusetts was the first state to utilize this so-called “ABC Test,” but that was done through a statute that had been debated in the Legislature. The key point is that this new and expansive test in California was created by the Court with a limited set of facts before it and not by the Legislature and Governor who would utilize a public process of enacting legislation.
Because this new test places in doubt the sustainability of virtually all independent contractor relationships in California and the decision, if left intact, has the potential to cause substantial economic harm to thousands of workers who desire to be independent contractors and the hundreds of thousands of California citizens who rely upon these workers and their services, the Governor and Legislature must pursue a statutory fix.
If the Legislature and Governor do not modify this court decision, it is likely to irreparably damage the business model of a broad swath of industries and billions of venture capital dollars that are increasingly invested in businesses that pair unique technologies and workplace arrangements, and the Dynamex decision could hinder California as a national leader in the innovation economy.
Chris Micheli is an attorney and lobbyist at the Sacramento governmental relations firm of Aprea & Micheli, Inc.