In Dynamex Operations West, Inc. v. Lee, the California Supreme Court created a new employee-friendly test for determining whether workers are properly classified as employees or independent contractors. While providing a level of certainty lacking in the prior standard, the Court’s new test significantly increases the burden on California employers in demonstrating that their workers are properly classified as independent contractors.
Since 1989, the leading test in California for distinguishing employees and independent contractors was the multifactor standard set forth in S.G. Borello & Songs, Inc. v. Department of Industrial Relations. Under Borello, the key question was whether the employer “[had] the right to control the manner and means of accomplishing the result desired.” In addition to this factor, the Borello test also endorsed multiple “secondary” indicia in analyzing and determining the employment relationship.
In 2008, the California Supreme Court issued its decision in Martinez v. Combs. Martinez did not concern the issue of whether a worker was properly classified as an employee or independent contractor. That case arose in the context of defendants’ argument that they were not “employers” under California law and, as such, focused on the meaning of the terms “employ” and “employer” as used in the California wage orders. The Court’s opinion determined that the term “employ” has three alternative definitions: (1) to exercise control over wages, hours, or working conditions, or (2) to suffer or permit to work, or (3) to engage, thereby creating a common law employment relationship.
Dynamex involved a putative class action filed by former Dynamex workers alleging the company improperly classified them as independent contractors, rather than employees. The issue for the Supreme Court to decide was the proper standard for determining worker classification for the purposes of the California wage orders. Plaintiffs argued that Borello was not the only applicable standard and that the Court could rely on the definitions of “employ” previously determined by the Court in Martinez. Dynamex disagreed and argued that Borello was the only applicable standard.
In determining the issue, the California Supreme Court engaged in a thorough analysis of both pre- and post-Borello law regarding worker classification. After this legal and historical analysis, the Court concluded that Martinez was applicable to the worker classification issue. Specifically, the Court held that the “suffer or permit to work” definition of “employ” properly applied to the worker classification issue. With that in mind, the Court then announced a new, more objective standard for determining worker classification for the purposes of the California wage orders.
Under this new standard, the burden is on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the coverage of the California wage orders. In order to satisfy this burden, the hiring entity must establish all of the following: (1) that the worker is free from the control and direction of the hiring entity in connection with the performance of work, (2) that the worker performs work that is outside the usual course of the hiring entity’s business, and (3) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. Because this is an “all or nothing” test, the Court encouraged courts to focus first on the more objective second and third factors prior to focusing on the less objective first factor.
Proper classification of workers is a critical piece in maintaining a legally compliant workplace and avoiding liability and Dynamex represents a new era in California law in determining that issue. While Dynamex provides employers with more certainty in this area, that certainty comes at the cost of having to satisfy a significantly higher standard in order to classify a worker as an independent contractor.