Death Knell for Independent Contractors in California?

By John W. Tulac

On April 30, 2018, The California Supreme Court ruled that independent contractors for the most part no longer exist in California. In Dynamex Operations West, Inc. v Superior Court, the California Supreme Court discarded the old test for independent contractors and imposed a new three-part test (described later) that most businesses engaging independent contractors in a regular basis will be unable to meet.

The old test, similar to the one used by the Internal Revenue Service, was base on the notion of control.  If the company controlled the time, manner or means by which the claimed independent contractor performed work, then the independent contractor was in fact an employee.  Many, if not most, claimed company-independent contractor failed this test, but the abuse, as both state and federal regulators viewed it, remained widespread.  Enforcement was hit or miss and companies could make arguments, some based on the older twenty-factors test, that the independent contractor relationship was valid.  The tremendous growth of the “gig” economy contributed to the continuation of independent contractors under circumstances that were dubious at best.

No more.  In Dynamex, the California Supreme Court considered a situation in which  two delivery drivers for themselves and all others similarly situated claimed that they were misclassified as independent contractors rather than employees under a company policy dating back to 2004 (prior to 2004 delivery drivers were classified and paid as employees).   Facts from the case:

“Dynamex is a nationwide same-day courier and delivery service that operates a number of business centers in California. Dynamex offers on-demand, same-day pickup and delivery services to the public generally and also has a number of large business customers—including Office Depot and Home Depot—for whom it delivers purchased goods and picks up returns on a regular basis.

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. For drivers who are assigned to a dedicated fleet or scheduled route by Dynamex, drivers are paid either a flat fee or an amount based on a percentage of the delivery fee Dynamex receives from the customer. For those who deliver on-demand, drivers are generally paid either a percentage of the delivery fee paid by the customer on a per delivery basis or a flat fee basis per item delivered.

Drivers are generally free to set their own schedule but must notify Dynamex of the days they intend to work for Dynamex. Drivers performing on-demand work are required to obtain and pay for a Nextel cellular telephone through which the drivers maintain contact with Dynamex. On-demand drivers are assigned deliveries by Dynamex dispatchers at Dynamex’s sole discretion; drivers have no guarantee of the number or type of deliveries they will be offered. Although drivers are not required to make all of the deliveries they are assigned, they must promptly notify Dynamex if they intend to reject an offered delivery so that Dynamex can quickly contact another driver; drivers are liable for any loss Dynamex incurs if they fail to do so. 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. Drivers purchase Dynamex shirts and other Dynamex items with their own funds.

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.

Drivers hired by Dynamex are permitted to hire other persons to make deliveries assigned by Dynamex. Further, when they are not making pickups or deliveries for Dynamex, drivers are permitted to make deliveries for another delivery company, including the driver’s own personal delivery business. Drivers are prohibited, however, from diverting any delivery order received through or on behalf of Dynamex to a competitive delivery service.

Drivers are ordinarily hired for an indefinite period of time, but Dynamex retains the authority to terminate its agreement with any driver without cause, on three days’ notice. And, as noted, Dynamex reserves the right, throughout the contract period, to control the number and nature of deliveries that it offers to its on-demand drivers.”

Honestly, does that seem remotely like a true independent contractor relationship? In my view, the facts show that the relationship fails the IRS control test and the old twenty- factors test.  So, what is the new test?

The Court refers to the new test as an “ABC” test.  A company asserting independent contractor status to establish each of the three factors of the ABC test must show that a worker is free from its control, is performing work outside the usual course of its business, and is customarily engaged in independent work.

The first part is nothing new. “Free from its control” means that the company cannot control the time, manner or means by which the worker does the work.  The company can only be interested in the result of that work. It is paying for the result and it is up to the worker to provide it in the worker’s own discretion.

The second part is a significant new development.  The work must be outside of the company’s ordinary scope of work.  This makes absolute sense.  The company has a legitimate interest in engaging the services of an independent contractor to provide a particular expertise or service that is not part of the company’s everyday business to address a particular problem or situation.  Thus engaging an IT specialist to improve a firewall or train staff on software is engaging a service that is often handled by an outside specialist or company instead of residing in house.  A pizza company hiring someone to deliver pizzas can’t justify the driver as an independent contractor.  The delivery service is directly related to its core business.   Simply put: workers commonly used on an everyday or regular basis for work that relates directly to the company business are no longer remotely classifiable as independent contractors.

The third part relates to whether the worker has a clearly established separate and distinct business, whether as a sole proprietor or business entity, holding out the service to any individual or company needing the offered service.  The worker has the opportunity to pick and choose customers or clients and controls, decline work, and controls the time, manner and means of doing the work, including having the necessary tools of the trade, if applicable.

Don’t meet the test?  Hire your people now and put them on the payroll.  Not sure?  Get expert assistance and be prepared to document your classification of independent contractor.  Be fair, do the right thing, and good luck.

 

John W. Tulac is an international business attorney practicing in Claremont, adjunct professor of law at University of La Verne College of Law (retired), and Lecturer Emeritus (retired) at Cal Poly Pomona.  He is peer recognized as preeminent in international business law and holds the highest ratings for competence and ethics from the Martindale Hubbell National Law Directory.