California Businesses Back in Limbo as Courts Again Redefine “Independent Contractor”
California employers thought they had finally caught a break when a federal court applied the test for independent contractors with a favorable eye toward business owners. Only a few months later, the pendulum may be swinging back towards employees. As this Californian saga illustrates, businesses nationwide should be sure that their wage-and-hour practices comply with this ever-changing and complex area of the law.
California employers breathed a sigh of relief back in February of this year when a federal court ruled that the food delivery service Grubhub had properly classified its delivery employees as independent contractors in the closely-watched Lawson v. Grubhub, Inc., a case brought by a worker pursuant to California wage-and-hour law. Defendant Grubhub, a classic “gig economy” employer, hires delivery drivers as independent contractors – meaning, among other things, that drivers are “in business” for themselves and can work for any of Grubhub’s competitors simultaneously. The stakes for such a classification are high: independent contractors are not entitled to the protection of nearly any labor laws, including minimum wage, overtime, unemployment insurance and worker’s compensation. The Court’s decision in Lawson gave California employers, including some of the state’s most high-profile companies such as Uber, another weapon in their arsenal when fighting wage-and-hour misclassification suits. That the decision came down in California – a state notorious among businesses for its worker-friendly laws and courts – made Lawson all the more welcome for employers nationwide.
This swing of the pendulum towards employers was short-lived, however, with the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Los Angeles County Superior Court. On April 30, 2018, the Court held that a simple, strict test to determine whether an employee was properly classified as an independent contractor should apply across the state. This test, dubbed the “ABC” test and used in other jurisdictions, defines an independent contractor as a worker who:
(A) is free from control and direction of the hirer; (B) performs work outside the usual course of the hirer’s business; and (C) is customarily engaged in anz“in an independently established trade, occupation, or business of the same nature as the work performed.”
The Court’s ruling applies only to “wage orders,” which, much like they do in New York State, regulate minimum wage and overtime (among other areas) for individuals employed in the state. Despite this narrow application, Dynamex still has far-reaching implications, both in that it controls for all claims brought under the wage orders and provides insight into what may signal a shift in priority by the highest court in the state.
As the Dynamex Court suggested, workers such as plumbers or electricians will likely remain classified as independent contractors, but currently classified independent contractors working in other occupations should be heavily scrutinized for compliance with the “ABC” test. California companies employing independent contractors in the state should re-examine those relationships in the wake of Dynamex or risk being on the hook for years’ worth of backpay and more. If you have questions about whether your wage-and-hour practices comply with the law in California or any state, please contact Philip S. Mortensen, Scott G. Grubin, or Rita Lenane-Massey.