On Wednesday, the California Supreme Court denied petition for rehearing and request for modification of its Dynamex Operations West v. Superior Court opinion. The Court’s April 30, 2018 opinion is now final, and its new test to determine independent contractor status in California (for wage and hour purposes) is the “law of the land.” In a letter delivered yesterday to California’s Governor and Members of the California State Legislature, a group of over 70 businesses and business organizations requested officials to delay or defer application of the Dynamex decision. It is extremely unlikely that such action will be taken. A copy of that letter is available here.
As a refresher, in Dynamex, the California Supreme Court adopted a new test to determine independent contractor status. This “ABC” test says a person is an independent contractor only if the hiring business can prove all three of the following: (1) the worker is free from control and direction of the hiring business both under contract and in fact; (2) the worker performs work outside the usual course of the hiring entity’s business; and (3) the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed. The general consensus of most attorneys is that anyone in California who utilizes independent contractors must reevaluate its business model, as well as the actual relationships the business claims are “independent.” Many businesses also must now cure any deficiency or consequence (minimum wage, time keeping, meal and rest breaks, paid leave, failure to pay wages at time of termination, just to name a few) of misclassifying individuals as independent contractors which Dynamex now says were, all along, employees.
Somewhere between 16% and 36% of the nation’s labor force involves the contingency workforce, which includes part-time, gig and independent contractors. Well-known entities have been built utilizing a contingency workforce, including Uber, Lyft, Instacart, DoorDash and Official Police Garages of Los Angeles. In the last year, some companies, including FedEx and TFI International (who acquired Dynamex while litigation was pending) have made fundamental adjustments to their California business models in an effort to avoid further litigation, penalties or large damage awards. “Clean up” settlements and offers are now being considered to ward off the inevitable cascade of class action lawsuits.
In yesterday’s letter, the companies, together with the California Chamber of Commerce, California Retailers Association, Computer Technology Industry Association, International Franchise Association, Building Owners and Managers Association and a long list of other trade groups and associations, asserted Dynamex will hurt individuals seeking flexible, independent or part-time work. The letter correctly noted Dynamex has the potential to eliminate “the vast majority of independent contractors in California” and “places in doubt the sustainability of a significant portion of independent contractor relations in California.”
A fair reading of the Dynamex opinion discloses that the Court views independent contractor status as a threat to rights and protections afforded to California workers. The decision clearly established a new and radically different public policy, different from that which was the law in California for over 50 years, and which is currently the law in the overwhelming majority of other states. In a previous Leech Tishman Client Alert, we stated that Dynamex will undoubtedly serve to increase litigation costs, including individual claims, class actions and representative actions under the Labor Code’s Private Attorney General Act. Now that the decision is final, Leech Tishman will track pending class actions involving gig economy businesses. It is our opinion that the vast majority of business models with which we have all recently become familiar, and which have been built by utilizing independent contractors, will no longer pass muster in California.
Whether the California Legislature is willing to introduce, debate and pass legislation that will limit or restrict application of Dynamex is unknown. The current legislative session is drawing to a close. Even assuming the Legislature is willing to act (which most employment law practitioners consider unlikely), the remaining time may be inadequate for considering any deferral or delay legislation. In that regard, businesses conducting operations in California would be wise to consider decisions by FedEx and TFI in the last year to move away from the independent contractor business model. Such decisions by very well-funded and litigation-tested companies most likely point to the practical conclusion that changing Dynamex is not in the cards.
Once again, any business of any size doing business in California and which uses independent contractors must carefully review all contracts or agreements, as well as the actual way in which the independent contractor performs labor, and then measure those results under the ABC test. Additionally, as in the Cheesecake Factory citation that we wrote about last week draws home, care must be exercised that even when there is a true independent contractor relationship, the payment of the independent contractor’s employees be verified. Failure of a true independent contractor to pay its own workers in compliance with California’s unique wage and hour laws can lead to significant uninsured liability on behalf of the hiring business.
Leech Tishman’s Employment Practice Group can help clients ensure compliance with California’s complex and technical employment laws and can assist clients with defending against civil or administrative actions.
If you have any questions regarding California’s unique employment laws or these employment law updates, please contact Philip Toomey. Phil serves as Leech Tishman’s West Coast Business & Employment Client Relations Partner and practices in the firm’s Employment, Corporate, Litigation and Real Estate Practice Groups. Phil is based in the Leech Tishman’s El Segundo, CA office. He can be reached at 424.738.4400 or ptoomey@leechtishman.com.
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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in alternative dispute resolution, aviation & aerospace, bankruptcy & creditors’ rights, construction, corporate, employee benefits, employment, energy, environmental, estates & trusts, family law, government relations, immigration, insurance coverage & corporate risk mitigation, intellectual property, international legal matters, litigation, real estate, and taxation. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in El Segundo, CA, Chicago, Los Angeles, New York, Sarasota and Wilmington, DE.