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Disrupting the Disrupters: The California Supreme Court Has Turned the “Gig Economy” into a Very Risky Business Model by Adopting the ABC Worker Classification Test

On April 30, 2018, the Supreme Court of California issued a ruling in Dynamex Operations West, Inc. v. Superior Court which profoundly altered the standard for determining worker classification for the purpose of wage and hour laws. The impact of that decision is likely to be far reaching.

Prior Classification Standard

Prior to Dynamex, California courts employed a multi-factor test, called the “Borello Test,” for determining worker classification. Under the Borello Test, employers were required to analyze approximately 20 or so factors when making a worker classification decision. The key focus of that test was the scope (or lack thereof) of the employer’s control over a worker. No one factor was determinative of the outcome, and it was generally understood that there was an inconsistent application of the test by both governmental agencies and industry employers. The Borello Test, although complicated, was considered less risky under certain circumstances.

Changes to Classification Standard

In Dynamex, the Court adopted a more simplified test which is currently applied in only two other states. The Dynamex test considers only three factors. A worker will NOT be considered an independent contractor unless all of these tests are satisfied: (A) “the worker is free from the 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) “the worker performs work that is outside the usual course of the hiring entity’s business”; AND (C) “the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.” Absent proof of these three factors, a worker will be presumed to be an employee.

Of these three factors, factor B is considered the most important. Under factor B, any worker who performs work within the “usual” course of a business will now be treated as an employee. To illustrate the meaning of the “usual course of business,” the Court gave as an example a situation where a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line. The Court opined that the services of the plumber or electrician are not part of the store’s usual course of business (i.e., retail sales), and the plumber or electrician were thus not employees. This raises the question of how the “usual course of business” is defined for many gig economy companies. While many gig companies such as ride sharing companies will argue that they are in the business of providing highly complex software platforms, under the new factor B, it is likely that a Court would define their “usual course of business as transporting customers via vehicles.”

The third factor, “Factor C” will require a showing that the worker has “independently made the decision to go into business for himself or herself.” The Court reasons that such workers would be expected to have taken “the usual steps to establish and promote his or her independent business,” for example, through “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.”

The Dynamex decision provided a framework for compliance with the new test; however, it remains to be seen how California courts will apply and interpret the three prongs of this new standard. It may take several years for a uniform analysis to form in the courts. Remaining unresolved are the issues of the retroactivity of the decision and the applicability of the test to other agencies.

The Dynamex decision is expected to severely impact the state of California and its workforce. According to a recent NPR/Marist poll published on January 22, 2018, twenty percent of all American workers are contract workers hired to work on a specific project or for a fixed period of time.[1] Further, independent contractors have contributed an estimated $1.4 trillion to the U.S. economy.[2] Narrowing in on the gig economy, twenty-four percent of American workers reported income from the digital platform economy in 2015. Despite substantial participation by the American workforce, many industry professionals speculate that the Dynamex decision may entirely ruin the gig economy. After all, a number of those providing services for gig economy companies take advantage of their idle capacity in order to fill a specific need or earn some extra money. In other words, they are performing these jobs as side hustles. They are not running an “independently established trade, occupation, or business,” which is a requisite demonstration under factor “C” of the ABC test.

Companies are well served by adopting a conservative approach to this new ruling. Damages in a wage and hour lawsuit can run into the hundreds of thousands of dollars range. A careful review of the tests and applicability to each company is highly advised.

[1] Yuki Noguchi, Freelanced: The Rise of the Contract Workers, NPR, Inc., January 22, 2018.

[2] Bailey Bifoss, The Future is Freelance, Fisher Phillips, October 18, 2017 https://www.fisherphillips.com/gig-employer/the-future-is-freelance.

 

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Lisa Chapman
lchapman@rroyselaw.com

Lisa is an experienced employment attorney and litigator. In her employment law practice, she helps startup and mid-size companies navigate and comply with Federal and state employment laws and regulations. This includes laws related to wage and hour requirements, sexual harassment and retaliation, worker classification (independent contractor vs. employee status), and overtime laws, among others.
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