17 Jul The California Supreme Court Deals A Blow To Independent Contractors
This article was originally published in Forbes.
In the landmark decision of Dynamex Operations West, Inc. v. Superior Court of Los Angeles, No. S222732 (Cal. Sup. Ct. Apr. 30, 2018), the California Supreme Court unanimously announced a new test for determining whether a worker is an employee or an independent contractor. Depending upon the nature and structure of certain franchise or licensing relationships, all of which are intended to be independent contractor relationships, this decision raises questions as to whether a court would consider a franchisee and its employees to be independent contractors or employees of their franchisor.
Dynamex involves the classification of delivery drivers for purposes of California’s Industrial Welfare Commission (IWC) Wage Orders. These orders impose obligations relating to minimum wages, maximum hours and other work conditions (e.g., 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. Drivers alleged that Dynamex had misclassified them as independent contractors rather than employees. Prior to 2004, Dynamex had classified its drivers as employees. In 2004, the company adopted a new contractual arrangement with drivers and began to classify them as independent contractors rather than employees. Under this new arrangement, all drivers were required to provide their own vehicles and pay for all of their transportation expenses, including fuel, tolls, vehicle maintenance, and vehicle liability insurance, as well as all taxes and workers’ compensation insurance.
Dynamex obtains its own customers and sets the rates to be charged to those customers for its delivery services. It also negotiates the amount to be paid to drivers on an individual basis. Some received a flat fee and some received a percentage of the delivery fee. Drivers were generally free to set their own schedule but had to notify Dynamex of the days they intended to work for Dynamex. On demand drivers had to obtain their own cellular telephone. Drivers made pickups and deliveries using their own vehicles, and were expected to wear Dynamex shirts and badges when making deliveries for Dynamex. Dynamex customers sometimes required drivers to attach Dynamex and/or the customer’s decals to their vehicles when making deliveries. Drivers purchased Dynamex shirts and other Dynamex items with their own funds. Except in certain circumstances, drivers were free to choose the sequence in which they made deliveries and the routes they took, but were required to complete all assigned deliveries on the day of assignment. Drivers could make deliveries for another delivery company, including the driver’s own personal delivery business.
When ruling that the drivers were employees, the California Supreme Court rejected its prior test for determining whether workers should be classified as either employees or independent contractors. Read strictly, the Court adopted a new rule for the limited purpose of interpreting California’s Industrial Welfare Commission’s wage orders. If interpreted more broadly, the new rule could apply as broadly to evaluating employment generally, including the classification of workers (i.e., whether a worker is an independent contractor or an employee) and whether a worker is a joint employee (i.e., an employee of two employers).
The Court adopted a standard that presumes that all workers are employees instead of contractors. The burden is now on any entity classifying an individual as an independent contractor. Under the newly adopted ‘ABC test,’ a worker is an independent contractor to whom a wage order does not apply only if the hiring entity establishes all of the following:
- (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.
Impact on Franchising
The initial impact of this case focused on how the decision would impact the ‘gig economy’ –ride hailing apps, as a start. As commentators and others evaluated the scope of the case, its potential application to more types of independent contractor relationships, including franchises, became clear. Dynamex did not involve a franchise relationship and there is no discussion of the franchise business model, leaving open how it might be applied to such relationships. In many franchises, it is the franchisor’s expertise in the licensed business—whether running a pizzeria or frying chicken—that attracted the franchisee in the first place. Many franchisors sell pizzas or fried chicken, just as their franchisees do. Does that mean that the ‘B’ factor is negated, turning all franchisees and their employees into the employees of the franchisor?
In the weeks since Dynamex, one California Appellate Court (Curry v. Equilon Enterprises, LLC) limited Dynamex to the determination of whether a worker is an employee or independent contractor and did not extend the case to ‘joint employment’ cases. We do not know if this case will be appealed or if other courts will follow its lead.
The ‘ABC test’ does not recognize the realities of the franchise business model nor the legislature’s statutory recognition of the franchise relationship. Thus, it remains an open issue as to how, if at all, the test adopted by the Dynamex Court will be applied in the franchise setting.