A recent development in the nationwide trend of attacks against the independent contractor business model is reflected in the 2018 California Supreme Court Dynamex Ruling (Dynamex Operations West, Inc. v. Superior Court of Los Angeles.
It is notable that the Dynamex Ruling was for the litigated purpose of determining employer- employee versus independent contractor status concerning wage orders (state wages, hours, and working condition requirements). However, the Court rationale in arriving at this Ruling may have more far reaching consequences, as indicated by the nationwide trend. The likely best solution is legislation at the federal level.
Although the Dynamex Ruling does not touch on issues of third-party liability arising from accidents incurred in the course of business operations (although it may not be a large leap to get there).
The distinguishing facts in the Dynamex matter is stated by the Court as follows:
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.
In essence, the underlying action rests on the claim that, since December 2004, Dynamex drivers have performed essentially the same tasks in the same manner as when its drivers were classified as employees…
Upon closer examination, we find material factors, as cited by the Court, relating to control and independence of the workers, employee v. independent contractor status:
Drivers make pickups and deliveries using their own vehicles, but are generally expected to wear Dynamex shirts and badges when making deliveries for Dynamex, and, pursuant to Dynamex’s agreement with some customers, drivers are sometimes required to attach Dynamex and/or the customer’s decals to their vehicles when making deliveries for the customer.
In the absence of any special arrangement between Dynamex and a customer, drivers are generally free to choose the sequence in which they will make deliveries and the routes they will take but are required to complete all assigned deliveries on the day of assignment. If a customer requests, however, drivers must comply with a customer’s requirements regarding delivery times and sequence of stops
In other words, it appears that the employer in this instance, Dynamex, had engaged workers as employees, and decided to convert the same workers to independent contractors for the purpose of “a cost saving measure”. It is easy to see why the optics of this scenario may be viewed with a jaundiced eye by man Courts. In this instance the Court observed that
As a matter of common usage, the term “independent contractor,” when applied to an individual worker, ordinarily has been understood to refer to an individual who independently has made the decision to go into business for himself or herself. (See, e.g., Borello, supra, 48 Cal.3d at p. 354 [describing independent contractor as a worker who “has independently chosen the burdens and benefits of self-employment”].) Such an individual generally takes the usual steps to establish and promote his or her independent business — for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like. When a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor by the unilateral action of a hiring entity, there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification. A company that labels as independent contractors a class of workers who are not engaged in an independently established business in order to enable the company to obtain the economic advantages that flow from avoiding the financial obligations that a wage order imposes on employers unquestionably violates the fundamental purposes of the wage order. The fact that a company has not prohibited or prevented a worker from engaging in such a business is not sufficient to establish that the worker has independently made the decision to go into business for himself or herself
Perhaps, so far so good. However, the California Supreme Court went materially beyond this rationale that the Dynamex reclassification was not legitimate. It Ruled that each of the three prongs of the ABC test must be met, to determine this independent contractor status, most notably, that
- “The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- The worker performs work that is outside the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.”
The Ruling that all three prongs must be met arguably makes it virtually impossible for a Motor Carrier operating in California, to use Owner Operator/Independent Contractors without incurring obligations under the California wage orders (state wages, hours, and working condition requirements). By extension of reasoning, this would also be true of a freight Broker, operating in California, engaging third party motor carriers, as the motor carriers would do not appear to meet the Prong ‘B’ test, as cited by the California Supreme Court — of performing “work that is outside the usual course of the hiring entity’s business”, insofar as the sole business of the freight Broker is arranging transportation of freight. In this regard, the Court concluded as follows:
First, with respect to part B of the ABC test, it is quite clear that there is a sufficient commonality of interest with regard to the question whether the work provided by the delivery drivers within the certified class is outside the usual course of the hiring entity’s business to permit plaintiffs’ claim of misclassification to be resolved on a class basis. In the present case, Dynamex’s entire business is that of a delivery service. Unlike 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,34 here the hiring entity is a delivery company and the question whether the work performed by the delivery drivers within the certified class is outside the usual course of its business is clearly amenable to determination on a class basis. As a general matter, Dynamex obtains the customers for its deliveries, sets the rate that the customers will be charged, notifies the drivers where to pick up and deliver the packages, tracks the packages…
The ’B’ pong, if broadly interpreted, could preclude most independent contractor relationships. This test would appear to leave only a narrow window of opportunity to achieve independent contractor relationship status, in scenarios where Workers could be designated as outside the core functions of a specific business, and therefore meeting this test, if they perform jobs differentiated from the usual
course of business per se, and that are typically outsourced, such as maintenance companies, financial support functions like payroll and accounting, and technical businesses like IT and call centers.
The “Control and Direction” criteria under prong ‘A’ is long-standing, and it’s the general test that the IRS uses, evaluating three factors of control:
- Behavioral – Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial – Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.).
- Type of Relationship – Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
As respects the ‘C’ prong, a “worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed,” the types of workers who would fit into this category would be licensed professionals that have their own independent business and/or work for a variety of customers within the scope of their professional duties. The IRS general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
Also, notably, this is not just a California issue. Several states have adopted the ABC Test to apply either as broad-based law, or for only specific situations, like determining unemployment insurance eligibility. States using the ABC test for varying purposes are Alaska, Connecticut, Delaware, Illinois, Louisiana, Maryland, New Hampshire, Oklahoma, Rhode Island, Vermont, Massachusetts, Nebraska, New Jersey, Nevada, Tennessee, Indiana, Washington and West Virginia. About half of the states use the ABC test standard at some level. Hence, the possibility of this Ruling serving as precedent for similar Rulings in other states is a material concern. Courts have taken different stances on this test. For instance, a U.S. Court in Philadelphia Ruled that limousine drivers for Uber are independent contractors, but the New York Unemployment Insurance Board ruled that Uber drivers are employees. Both cases used “control and direction” as criteria.
Although there have been some positive developments in Rulings and legislation enacted at the state level, businesses that use independent contractors remain targets for class and collective actions under state and federal wage payment laws, minimum wage and overtime laws, and employee expense laws. We may refer to a number of recent large settlements, including the following;
- Court approval of separate settlements of $27 million (2017) and $20 Million (2019) between Lyft and drivers who use that app;
- An $8.75 million settlement between Postmates and couriers who make deliveries using that company’s app;
- A $5 million settlement between nine San Francisco nightclubs and exotic dancers;
- A $4.65 million settlement between Instacart and shoppers who shop, purchase, and deliver groceries to customers at their homes and businesses through Instacart’s app; and
- A $1.48 million settlement between Atlas Van Lines and truck and moving drivers.
Additional Litigation on these issues, involving Lyft, Uber, Postmates and Instacart, among others, is ongoing.
The broad scope of the ABC test, and in particular the ‘B’ prong, could potentially have far reaching consequences on the ability to engage commerce under a contractor – independent contractor business model. For this reason, a clarifying remedy at the federal level would prove useful. In this respect, two bills were introduced in Congress that sought to facilitate the use of independent contractors. The ‘New Economy Works for Guarantee Independence and Growth (NEW GIG) Act’ (S. 700 (Senator Thune) and H.R. 1625 (Representative Rice)) was introduced in both houses of Congress. This bill, if enacted, would create a safe harbor for income and employment tax purposes where contractors meet certain criteria. The ‘Portable Benefits for Independent Workers Pilot Program Act’ (S.541 (Senator Warner) and H.R. 2685 (representative DelBene, in 2017), if enacted, would create a $20 million fund for states, local governments, and non-profit organizations to study “broad innovation and experimentation with respect to portable benefits” for independent workers.
Clearly, a key initiative to safeguard the Independent Contractor business model across a wide array of industries, including logistics and the freight Broker model) is supporting and encouraging our legislators with these federal remedies.