Tag Archives: dynamex

Epic Policy Failure on Contractors

“The rest, in swarms, will overrun the boat deck

They’ll lose all sense of right and wrong

It will be every man for himself, all right!

The weak thrown in with the strong!”

Titanic, A New Musical (1997)

On April 30, 2018, the California Supreme Court issued its opinion in Dynamex Operations West, Inc. v. Superior Court (2018), 4 Cal. 5th 903. The court filled a void, in its view, of how to determine whether someone was an employee subject to wage orders of the Industrial Accident Commission.

Even before the ink fully dried on this monumental opinion, the California legislature sprang into action. Assembly Bill 5 (Gonzalez) was introduced on Dec. 3, 2018, to codify this new rule of law and to expand its “ABC test” to unemployment and workers’ compensation. From that effort then sprang a comical – or tragic, depending on your point of view – effort by a multitude of businesses to gain a reprieve from the ABC test, which was adopted by the court without legislative blessing, or even at the urging of the parties in the litigation, in an effort to curb the abuses of misclassification of workers as independent contractors.

AB 5 granted various forms of absolution to a multitude of businesses. Some achieved an appropriate complete exemption from the now-codified ABC test. Others are now compelled to go through various requirements to achieve dispensation, some requirements either being hopelessly ambiguous or impossible (or meaningless) to comply with. Still others were left outside the cathedral doors (also known as the Capitol in Sacramento) in hopes that their petitions for relief would be heard.

The ABC test as codified and amplified by AB 5, now Labor Code § 2750.3, is a complicated set of outright exemptions, quasi-exemptions and – as was seen with the case of various freelance artists and writers – exemptions that were illusory in the face of the reality of such work. The freelancers began an aggressive campaign last fall to get the law changed in 2020. In some respects, their efforts are succeeding.  

When the legislature returned in 2020, there were dozens of bills introduced to delay, modify or outright repeal AB 5. Most were by Republican authors, and most were never heard in policy committees: the Assembly Labor and Employment Committee or the Senate Labor, Public Employment and Retirement Committee. Today, changes to AB 5 will have to come from two bills by the same author, Assemblymember Lorena Gonzalez (D- Dan Diego), who is also the author of AB 5. The first bill is Assembly Bill 1850 (Gonzalez), the second Assembly Bill 2257 (Gonzalez). Both bills are moving in the legislative process. AB 2257 specifically deals with the issues raised by freelancers. According to the analysis in the Assembly Labor and Employment Committee, California Freelance Writers United supports the measure, as do many others in the art, music and content-creation industries who use freelance workers. And, per the analysis by the Assembly Labor and Employment Committee, Assemblymember Gonzalez intends to add an urgency clause to AB 2257, meaning that it would become effective on signature by the governor and not upon Jan. 1, 2021. And so, freelancers achieved their objective.

AB 1850 includes the same language as AB 2257, at least for the moment. It also contains much more. This includes rewriting and reorganizing Labor Code § 2750.3 and adding still more exemptions from the ABC test. 

As proposed in AB 1850, there are nearly 50 occupations or business relationships that are not subject to the ABC test in Labor Code § 2750.3. Some of these exemptions are based on occupations, some on occupations provided that certain criteria are met and some on business-to-business or referral agency relationships. Many of these exemptions will require a careful analysis by a business if they are to be sure of passing muster with the labor commissioner, the Employment Development Department (EDD) and workers’ compensation insurance company premium auditors. The exemptions, in one form or another, maintain the venerable multi-factor test in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 or, in the case of occupations where the legislature augmented this standard, what is now called “Borello +.”  

See also: How to Lead and Collaborate in Claims  

The business-to-business exemption remains inscrutable and should particularly cause persons involved in a franchise relationship great concern even as the applicability of Dynamex to franchises remains the subject of significant litigation. The problem remains that, while the relationship between a worker and a business service provider is governed by the ABC test, the statutory language in Labor Code § 2750.3 refers to the degree of control of the contracting business over the business service provider and not the employees of the business service provider. This seemingly obvious distinction was not clarified by the Sept. 13, 2019, letter from Assemblymember Gonzalez to the Assembly clerk trying to explain on the one hand whether a business service provider was an employee of the contracting business while also stating that nothing in AB 5 was intended to change the laws relating to joint employment.

The claimed abuses of application-based drivers and service providers have frequently been cited as the raison d’être for AB 5. There is a battle in the California courts over the classification status of workers in the digital marketplace. Most recently, on May 5, 2020, in People of the State of California v. Uber Technologies, San Francisco County Superior Court No. CGC20584402, California Attorney General Javier Becerra and several city attorneys stated:

“But rather than own up to their legal responsibilities, Uber and Lyft have worked relentlessly to find a work-around. They lobbied for an exemption to A.B. 5, but the legislature declined. They utilize driver contracts with mandatory arbitration and class action waiver provisions to stymie private enforcement of drivers’ rights. And now, even amid a once-in-a-century pandemic, they have gone to extraordinary lengths to convince the public that their unlawful misclassification scheme is in the public interest. Both companies have launched an aggressive public relations campaign in the hopes of enshrining their ability to mistreat their workers, all while peddling the lie that driver flexibility and worker protections are somehow legally incompatible.”

This lengthy polemic is another way of saying Uber and Lyft (among others) have gone and filed an initiative to deal with the classification issue. Well, shame on them.

On May 22, 2020, the initiative, “Protect App-Based Drivers and Services Act,” became eligible for placement on the November 2020 ballot. If it is not withdrawn by June 25, the voters of California will decide whether app-based workers, such as those for Uber or Lyft, are employees or independent contractors. The issue, as you might assume, is clearly more complicated than that, given the various requirements in the initiative necessary to qualify for an exemption to the ABC test.

See also: 4 Key Changes to WC From COVID-19  

It is safe to assume that the initiative polls very well with the public. It also is likely to pass.

So, by next year, the ABC test, “… whose objective is to create a simpler, clearer test for determining whether the worker is an employee or an independent contractor,” (Dynamex, 4 Cal. 5th 951, fn. 20) will have dozens of exemptions acquiesced to by the legislature and, likely, an exception that nearly overwhelms the rule should the initiative pass on app-based drivers and service providers. 

Why are we doing this? It is an epic public policy failure to suggest the only distinction between an entrepreneurial worker and an exploited one is whether 21 senators, 41 Assembly members and one governor in Sacramento decide to issue a pass. It may be too late to reset the dialogue in California on this issue, between court challenges and, potentially, a successful ballot measure. It is not too late elsewhere, including in Congress.

Implications of Ruling on Gig Workers

What is remarkable about the debate over California Assembly Bill 5 (Gonzales) is how unremarkable the issues actually are in the debate over the Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903.

Of course, as has been well-documented, the Dynamex holding and AB 5 could disrupt the digital platform “gig” economy, and misclassification of employees as independent contractors is a vitally important issue. It has serious implications for the fundamental fairness of how businesses compete with one another and how we value and protect workers on whose endeavors our entire economy depends.

But the debate, while appearing in the digital marketplace as its latest forum, is multi-generational.

The Dynamex decision is the current law of California as it relates to classification (employee or independent contractor) disputes over wage and hour obligations of California employers. AB 5 is intended to codify this decision not only for wage and hour determinations but also for unemployment insurance obligations and workers’ compensation coverage. This legislative process has led to chaos, with a host of employers asking for dispensation from the “ABC” test borrowed from Massachusetts (and used in Illinois and New Jersey, among other states), arguing that the test should not really apply to, among others, dog groomers, hairdressers, real estate agents, truckers and insurance producers. The list goes on and on. The queue is as long as it was in Casablanca when desperate people were seeking exit visas at any cost from Rick’s Café Américain.

But Dynamex isn’t the product of the California Supreme Court sitting down together over lattes one afternoon and deciding, “Well, let’s change the law on classification disputes involving independent contractors and see what happens.” It was a final decision in which the trial court and the court of appeal used existing tests for independent contractor status to arrive at the conclusion that Dynamex workers were, in fact, employees. In other words, even though imposing the now infamous “ABC” test in California, the Supreme Court affirmed the decision of the court of appeal.
It is unfortunate, but not surprising, that Dynamex is being divorced from its facts in the current, overheated debate in Sacramento.

Perhaps the most important part of the court’s lengthy decision is found in this part of the factual record:

“Prior to 2004, Dynamex classified its California drivers as employees and compensated them pursuant to this state’s wage and hour laws. In 2004, Dynamex converted all of its drivers to independent contractors after management concluded that such a conversion would generate economic savings for the company.” Dynamex, 4 Cal.5th 917, emphasis added.

There is simply no test for classification status that would not be triggered by this action. And indeed it was, in the lower courts invoking both Martinez v. Combs (2010), 49 Cal.4th 35 and the now iconic decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 256 Cal.Rptr. 543, 769 P.2d 399.

That leaves us with the question – how to address the misclassification of a workforce while preserving the ability and prerogative of an individual worker as a sole proprietor to offer his or her skills to businesses that need such services on an ad hoc or project basis while not displacing work that would normally be done by an employee.

See also: Keys to California’s Consumer Privacy Act  

It is a question for the court – because the legislature could not resolve it – to clarify the comment:

“As explained, in light of its history and purpose, we conclude that the wage order’s suffer or permit to work definition must be interpreted broadly to treat as ’employees,’ and thereby provide the wage order’s protection to, all workers who would ordinarily be viewed as working in the hiring business.” Dynamex, 4 Cal. 5th at 916, emphasis in original.

This is the “B” part of the test adopted in Dynamex that is causing millions of dollars to be spent lobbying in Sacramento and may result in tens of millions being spent in a costly ballot measure in 2020.
This is also the core issue left unresolved by AB 5. What AB 5 does in its present state, however, is to accelerate the path to the Supreme Court for it to address the ABC test in a broader context than the facts presented in Dynamex. It can be argued that the legislature is doing little more than asking, ultimately, for the court to refine its application consistent with the public policy objectives articulated in that decision. However, the complex rules now in AB 5 will cause both employers and workers considerable grief in coming years.

Key Ruling on Who Is a Contractor

Sometimes you’re the disruptor. Sometimes you’re the disrupted.

In an 85-page missive, the California Supreme Court, in Dynamex Operations West vs. Superior Court (2018), S222732, unanimously left no doubt that for wage and hour purposes fewer individuals will be independent contractors. Commentators nationwide were quick to opine that this was a major blow to the gig economy.

The new test for employment status, the “ABC” test, was set forth by the court in its April 30 decision. Basically, the test uses three criteria. Per the court:

“Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (A) 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 such work and in fact; (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 for the hiring entity.”

The second criterion, “B,” that the worker performs work that is outside the usual course of the hiring entity’s business, will likely prove to be the most disruptive. While each case depends on the facts to a degree, establishing the hiring entity’s business is not a nuanced inquiry. The burden of proof is on the employer to prove independent contractor status and that each of the ABC standards are met. Failure to prove any element means the worker is an employee.

See also: The State of Workers’ Compensation  

The issue of employment status within the workers’ compensation system, however, was not before the court in Dynamex. Thus, the court’s prior holding in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 remains the applicable standard for resolving whether someone is an employee for workers’ compensation purposes. The court in Dynamex acknowledged that, “…because the Borello standard itself emphasizes the primacy of statutory purpose in resolving the employee or independent contractor question, when different statutory schemes have been enacted for different purposes, it is possible under Borello that a worker may properly be considered an employee with reference to one statute but not another.”

Under Borello, the Supreme Court stated that the determination of employment status cannot be decided absent consideration of the remedial statutory purpose of the workers’ compensation laws. The court then acknowledged as factors the primary test of right of necessary control over the manner and means used, whether the task is part of the principal’s regular business and discharge is terminable at will, whether the worker has a distinct business with equipment or employees that is subject to profit or loss, the skill and supervision required, mode of payment, bargaining position of the parties and their intent. [As summarized in Ware v. Workers’ Comp. Appeals Bd., 92 Cal.Rptr.2d 744, 78 Cal.App.4th 508, 511 (Cal. App., 1999.)] The court in Borello also stated, citing previous authority, that “…the individual factors cannot be applied mechanically as separate tests; they are intertwined, and their weight depends often on particular combinations.”

It is difficult, however, to articulate the basic public policy rationale supporting the idea that there is a significantly different “statutory purpose” between enforcement of payment of wages to employees and providing those employees the benefits necessary to recover from an injury arising out of and in the course of employment. Certainly, the statutes address different issues. That is not the same as saying that in one case (payment of wages) there should be a more expansive definition of “employee” than under the workers’ compensation laws. That is particularly the case when one considers that during the time an injured worker is recovering from the effects of his or her injury, temporary disability benefits are provided to make up for lost wages.

In other words, isn’t the statutory purpose behind making certain employees receive the wages to which they are entitled just as pressing whether the issue is protecting someone from an unscrupulous hirer or whether it is to protect the employees from the loss of wages due to a workplace injury? Yet the court is making a distinction in Dynamex.

It would seem that public policy dictates the standard should be the same – regardless of what that standard is. It will be left either to the courts to extend the ABC test to workers’ compensation in the appropriate case or require the legislature to intervene and harmonize these tests.

The Dynamex decision will lead to considerable litigation. Although it may be anticipated that a new wave of wage and hour claims are in the process of being prepared, it is premature to immediately assume that independent contractors have en masse been transformed into employees. Any business using independent contractors, however, should already be assessing how its operations are affected by the ABC test and make the appropriate adjustments. One of the many unanswered questions for hirers is what happens when an individual is considered an “employee” of multiple employers?

See also: 25 Axioms Of Medical Care In The Workers Compensation System  

For workers’ compensation insurers, there is the added confusion that an employee for wage and hour purposes may not be an employee for workers’ compensation purposes, meaning that the “Dynamex” payroll will be larger than the “Borello” payroll. There is also the possibility that a worker will not be sufficiently attuned to these legal maxims and file a workers’ compensation claim. In such instances, the reconciliation of Dynamex and Borello will be, in the first instance, up to the Workers’ Compensation Appeals Board.

Today, there are far more questions than answers in the wake of the Dynamex decision. The speed with which these questions get answered will depend more on the legislature than the courts. But, in today’s innovative economy the intructions are clear: Disrupt, adapt, repeat.