In a long-awaited decision, the California Supreme Court, on April 30, 2018, issued its opinion in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County, a case involving the test to be applied under California law to determine whether a worker should be classified as an employee or an independent contractor.
The court adopted a broad version of what is known as the "ABC" test, which presumes that a worker is an employee unless the putative employer satisfies a three-part test.
At issue in Dynamex was the proper classification of delivery drivers for purposes of California's Industrial Welfare Commission (IWC) Wage Orders, which impose obligations relating to minimum wages, maximum hours and other work conditions (eg, rest breaks) for California employees. The case was brought by two delivery drivers as a putative class action against Dynamex, a same-day courier and delivery company, alleging that the company had misclassified the drivers as independent contractors rather than employees. Prior to 2004, Dynamex had classified drivers as employees. In 2004, the company adopted a new contractual arrangement with drivers and began to classify them as independent contractors. The lawsuit followed that decision.
After initially denying class certification, the trial court certified a class, relying on the employment relationship definitions set forth in Martinez v. Combs, 49 Cal. 4th 35 (2010). Martinez held that "employ" under the California Wage Orders has three alternative definitions:
- to exercise control over the wages, hours, or working condition
- to suffer or permit to work or
- to engage, thereby creating a common law employment relationship.
The Court of Appeal upheld the trial court, holding that the Martinez definitions were applicable to the employee or independent contractor questions with respect to the California Wage Orders issues.
Dynamex appealed to the California Supreme Court, challenging the applicability of the Martinez definitions. The court upheld the trial court's class certification and its conclusion that the Martinez definitions are applicable to the question of whether a worker is considered an employee or an independent contractor for purposes of the obligations imposed by the California Wage Orders.
In confirming the applicability of Martinez, the court ruled that in determining whether a worker is an employee or an independent contractor under the "suffer or permit" to work definition, a version of the ABC test is to be applied.
Under the version of the test adopted by the California Supreme Court, under California law a worker is considered an independent contractor to whom a Wage Order does not apply only if the putative employer establishes:
A. that the worker is free from the control and direction of the hirer in performance of the work, both under the parties' contract 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 ABC test applied by the court includes a broad version of part B, the same version applied under Massachusetts law in Awuah v. Coverall North America, Inc., 707 F. Supp. 2d 80 (D. Mass. 2010), where Coverall was found to be engaged in the same course of business as its franchisees.
Under a narrower version used in most states, the putative employer may satisfy part B by establishing either (1) that the work is outside the usual course of the business for which the work is performed, or (2) that the work performed is outside all the places of business of the hiring entity. Under the broader version adopted by the Dynamex court, the putative employer can satisfy part B only if it establishes that the worker performs work that is outside the usual course of the business of the hiring entity. Thus, it is not sufficient that the worker may perform work outside the putative employer's places of business. The putative employer must establish that its usual course of business is different from the work performed by the worker. The court reasoned that the broader version of part B is appropriate in light of contemporary work practices, where employees may telecommute or work from their homes.
Significance to franchising
The test used to determine whether a worker is classified as an employee or an independent contractor may have major implications in the franchise context, including on misclassification claims by franchisees. Dynamex did not involve a franchise relationship and there is no discussion of franchising in the decision. Thus, it remains an open issue as to how, if at all, the test adopted by the California Supreme Court would be applied in the franchise setting.
If you have any questions or would like to discuss how this decision may relate to your franchise system, please contact the authors.