California Supreme Court Clarifies Test for Employment Status Under IWC Wage Orders

As clients of the firm will know by now, on Monday, April 30, the California Supreme Court issued its long-awaited decision in Dynamex Operations West Inc. v. Superior Court, addressing the standard for determining whether workers are employees or independent contractors under California’s wage and hour laws. As has been widely reported, the Court held that workers are employees under California’s Industrial Welfare Commission (IWC) wage orders (Wage Order No. 9 covers transportation employees) if an employer “suffers or permits” them to work, and that this open-ended standard should be analyzed under the similarly broad ABC test employed in some jurisdictions. While the “suffer or permit” language is found in an IWC order, the Court’s adoption and interpretation of the ABC test is premised expressly and exclusively on the Court’s belief that California public policy favors the classification of most workers as employees.  

The Dynamex decision raises as many questions as it answers, and it would be premature to issue sweeping conclusions or definitive forecasts about its eventual impact. Greg Feary and the Owner-Operator Practice Section, along with Jim Hanson and the Class Action Practice Section, and their respective teams, including several of the firm’s California-licensed attorneys, are developing guidance to address the decision both on an operational level and in connection with ongoing cases. For now, here are some preliminary observations about the Court’s decision and its potential implications:

What did the California Supreme Court decide? The California Supreme Court held that the common law “Borello” test for determining employment status, set out in the case of S.G. Borello & Sons Inc. v. Department of Industrial Relations, does not apply to wage and hour claims based on California IWC wage orders. Instead, based on the IWC’s definition of employment, an employee is anyone a business “engage[s], suffer[s] or permit[s]” to work as an employee. The Court held that this standard has to be analyzed under the so-called ABC test used in other jurisdictions. Under the ABC test, a worker is presumed to be an employee unless the business proves that (A) 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) 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 for the hiring entity. 

When can a driver be an independent contractor under the B prong? The typical argument is that drivers are employees under the ABC test because they perform work within the usual course of a carrier’s business. That was the argument in Dynamex. The Court did not decide the question, but rather held that the question was sufficiently common to all class members to be resolved collectively. Still, language in the Court’s opinion is troubling. For example, the Court explained that skilled workers like electricians and plumbers hired to perform their trade services would not be considered employees if their services were not part of the hiring entity’s core business. The Court particularly suggested that delivery drivers such as those serving Dynamex were likely employees because Dynamex was in the delivery business. Still, the Court suggested (although without explanation) that there may be “other types of businesses in which the delivery of a product may or may not be viewed as within the usual course of the hiring company’s business,” and it remains to be seen, for example, whether drivers of business vehicles and heavier vehicles might yet be viewed as distinct from small vehicle delivery drivers like those of Dynamex so as to meet the B prong (for example, many Dynamex drivers operate smaller vehicles (many personal autos) and do not need a CDL, and, with limited exceptions (such as hazardous materials), are not covered by the FMCSRs.

The legion of cases across the United States finding drivers to be independent contractors, coupled with the fact that independent contractor truck drivers are truly independent as evidenced by the fact they have their own trade associations, including OOIDA, suggest that there should be space for independent contractor drivers, even in California. Moreover, an interpretation of the B-prong as comprehensively prohibiting truck drivers from providing services to motor carriers as independent contractors would seem to be the kind of direct economic regulation prohibited by the Federal Aviation Administration Authorization Act (FAAAA). The First Circuit Court of Appeals struck down Massachusetts’ statutory ABC test under the FAAAA for this reason.

What was driving the Court’s decision? The 86-page decision copiously chronicled the history of the application and purpose of certain independent contractor tests and expressly evoked the child labor law protectionist views of the early 1900s to support the Court’s expansive determination of employer status. The Court made it clear that its decision was based almost exclusively on its belief that workers in California should generally be employees. As the Court stated, “adoption of the exceptionally broad suffer or permit to work standard in California wage orders finds its justification in the fundamental purposes and necessity of the minimum wage and maximum hour legislation in which the standard has traditionally been embodied,” and “[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 and want the fundamental protections afforded by the wage order do not lose those protections.” Consistent with this policy preference, the Court dismissed as irrelevant the undeniable fact that many drivers prefer to operate independently. First, according to the Court, the state’s interest in securing wage and hour benefits afforded to employees outweighed any personal choice. And second, if workers were permitted to operate independently, other workers would be displaced because businesses would prefer to retain the services of independent contractors.

When does the Dynamex test apply? The Court stated that the ABC test applies to claims arising under IWC wage orders, and cited claims for minimum wages, overtime, meal and rest breaks, and wage statement violations as examples. The Court of Appeal held that the plaintiffs’ claims for unreimbursed business expenses under Labor Code § 2802 were not subject to the test. The California Supreme Court did not address that issue, and while it suggested that the employment status of workers pursuing such claims would remain governed by the Borello test, the issue remains open and will likely be the subject of litigation in the near future.

What comes next? As noted above, the firm is hard at work developing guidance for our clients on this significant development. On the operational side, the Court’s decision may support more robust adoption of the settlement carrier model as a way of further highlighting the independence of owner-operator drivers. Given the nature of the Court’s holding, a legislative response is an option to be considered.

For questions about the California Supreme Court decision, please contact Jim Hanson or Greg Feary.