DYNAMEX ABC TEST

 

1. MISCLASSIFICATION UNDER THE ABC TEST

In Dynamex Operations W. v. Superior Court, the California Supreme Court set out to solve the long-standing issue of whether a California worker is considered an employee or an independent contractor. 4 Cal.5th 903 (2018). In its ruling, the Court established the “ABC Test”, which outlines the balancing test used to determine a worker’s employment classification status. Following the Dynamex ruling, California Governor Gavin Newsom codified the “ABC Test” into law. Known as “Assembly Bill 5”, or “AB 5”, the codification of AB 5 into California law affirmatively sets the standard required when classifying California workers.

First, and perhaps most notably, the ABC Test presumptively considers all California workers to be employees. This means that California workers may only be classified as independent contractors if the hiring entity demonstrates that the worker in question satisfied each of the following three conditions:

• That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact;
• That the worker performs work that is outside the usual course of the hiring entity’s business; and
• That the worker customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. Dynamex, supra, 4 Cal.5th at 955-956; see AB 5.

If a hiring entity fails to satisfy any of the three elements provided above, then the worker must be classified as an employee.

1. Is the Worker Free from the Control and Direction of the Hiring Entity in the Performance of the Work, Both Under the Contract for the Performance of the Work and in Fact?

Part “A” of the ABC Test evaluates to what extent an entity exerts its control and direction over the worker. The California Supreme Court explained that part “A” of the ABC Test should be applied in the following manner:

1. The hiring entity must establish that the worker is free of such control to satisfy part A of the ABC Test. Dynamex, supra, 4 Cal.5th at 958.
2. A worker who is subject, either as a matter of contractual right or in actual practice, to the type and degree of control a business typically exercises of employees, would be considered an employee. Id.
3. Depending on the nature of the work and overall arrangement between the parties, a business need not control the precise manner or details of the work in order to be found to have maintained the necessary control that an employer ordinarily possesses over its employees. Id.

To satisfy part “A” of the test, the hiring entity must therefore establish that the worker is free of such control. Id.

1. Does the Worker Perform Work that is Outside the Usual Course of the Hiring Entity’s Business?

In order to satisfy part “B” of the ABC test, a hiring entity must establish:

1. That the worker performs work that is outside the usual course of its business. Dynamex, supra, 4 Cal.5th at 961.
2. All contracted workers who provide services in a role comparable to that of an existing employee will likely be viewed as working in the usual course of the hiring entity’s business. Id. [citing Rutherford Food Corp. v. McComb, 331 U.S. 722, 729 (1947).].

Examples where services are outside of the hiring entity’s usual course of business:

• When a retail store hires an outside plumber to repair a leak in a bathroom on its premises.
• When a retail store hires an outside electrician to install a new electrical line.

Examples where services wire within the hiring entity’s usual course of business:

• When 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.
• When a bakery hires cake decorators to work on a regular basis on its custom-designed cakes. Id. at 959-960.

Lastly, the court in Rutherford explained that “[t]reating all workers whose services are provided within the usual course of the hiring entity’s business as employees is important to ensure that those workers who need the fundamental protections afforded by the wage order do not lose those protections. Supra, 331 U.S. at 729.

1. Is the Worker Customarily Engaged in an Independently Established Trade, Occupation, or Business of the Same Nature as the Work Performed for the Hiring Entity?

To satisfy part “C” of the ABC test:

1. A hiring entity must prove that the worker is customarily engaged in an independently established trade, occupation, or business. Dynamex, supra, 4 Cal.5th at 963.
2. The hiring entity cannot unilaterally determine a worker’s status simply by assigning the worker the label “independent contractor” or by requiring the worker, as a condition of hiring, to enter into to contract that designates the worker as independent contractor. Dynamex, supra, 4 Cal.5th at 962 [citing G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 342, 349, 358-359 (1989); Rutherford, supra, 331 U.S. at 729.].
3. The term “independent contractor,” when applied to an individual worker, is understood to refer to an individual who independently has made the decision to go into business for him or herself. Id. [citing Borello, supra, 48 Cal.3d at 354 [describing independent contractor as a worker who “has independently chosen the burdens and benefits of self-employment.”]. An individual who independently has made the decision to go into business generally takes the usual steps to establish and promote that independent business.

Examples of this Include:

• 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.

Dynamex, supra, 4 Cal.5th at 962.

4. If an individual’s work relies on a single employer, Part C is not met. For example, Part C was not satisfied where a taxi driver was required to hold a municipal permit that may only be used while that driver is employed by a specific taxi company. See Garcia, supra, 28 Cal.App.5th at 575.
5. The independent business operation must actually be in existence at the time the work is performed. The fact that it could into existence in the future is not sufficient. Id. at 574.

Thus, when a worker does not fall under this definition but instead has simply been designated an independent contractor by the unilateral action of a hiring entity, “there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification.” Id., italics added.

A company that labels employees who are “not engaged in an independently established business” as independent contractors, has therefore “unquestionably violate[d] the fundamental purposes of the wage order.” Id.

1. WHEN THE ABC TEST DOES NOT APPLY

AB 5 and California Labor Code section 2775 et seq. do not require that the Dynamex ABC Test be used in all situations. Situations where the ABC Test does not apply include:

1. Instances in which the Legislature or the Industrial Welfare Commission (“IWC”) has defined the employment relationship in a specific way. In such cases, the ABC test will not otherwise apply to establish employee status or employer liability. Rather, the specific language contained in the IWC wage orders, the California Labor Code, or Unemployment Insurance Code will remain in effect.
2. Where a court determines the ABC test cannot apply for a reason other than an express exception, the Borello test will apply. For example, if a court were to determine in a particular case that the ABC test is preempted by an applicable federal law, the Borello test would be used.
3. Finally, the ABC test may not apply for certain occupations and contracting relationships.

• DYNAMEX ABC TEST COMPARED TO THE BORELLO TEST

Where the Borello Test and the Dynamex ABC Test are the Same:

The Dynamex ABC test and the Borello test both assume that the worker is an employee, and that the hiring entity must prove that the worker is an independent contractor.

Where the Dynamex ABC Test and the Borello Test Differ:

Under the Borello test, no single factor is dispositive of whether a worker is an employee or independent contractor. The Borello test employs a multi-factor balancing test, in which the facts and circumstances of each worker’s case is weighed against the Borello factors to determine whether such worker is an employee or an independent contractor. Courts will consider all potentially relevant facts, on a case-by-case basis, and will examine (1) the nature of the work; (2) the overall arrangement between the parties; and (3) the purpose of the law.

Wherein the Dynamex ABC test differs from the Borello test in that the ABC test is designed to make it easier for both hiring entities and workers to determine whether a worker is an independent contractor or an employee. Under the ABC test, rather than a multi-factor balancing test, the ABC test employes a more objective test, in which the inability of the hiring entitiy to demonstrate that the worker is not an independent contractor is dispositive of the conclusion that the worker is in, in fact, an employee.

For assistance, or more information regarding California worker classification, and how to avoid misclassification, contact the employment attorneys at San Diego Biz Law, APC.

The material in this article, provided by San Diego Biz Law, APC, is designed to provide informative and current information as of the date of the post. It should not be considered, nor is it intended to constitute, legal advice or promise similar outcomes.