The California Supreme Court recently issued a ruling which has had a seismic effect on California employment law. The ruling concerns whether an individual worker should properly be classified as an employee or, instead, as an independent contractor. The Court’s opinion in
Dynamex Operations West, Inc. v. Superior Court of Los Angeles County (2018) 4 Cal. 5th 903 now makes it nearly impossible for employers to claim workers are independent contractors.

The Supreme Court recognized that the question of how to classify workers has “considerable significance for workers, businesses, and the public generally. On the one hand, if a worker should properly be classified as an employee, the hiring business bears the responsibility
of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and . . . . complying with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees. The worker then obtains the protection of the applicable labor laws and regulations. On the other hand, if a worker should properly be classified as an independent contractor, the business does not bear any of those costs or responsibilities, the worker obtains none of the numerous labor law benefits, and the public may be required under applicable laws to assume additional financial burdens with respect to such workers and their families.”

The facts of the Dynamex case can be summarized as follows:

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.

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 decided to convert all of its drivers to independent contractors after management concluded that such a conversion would
generate economic savings for the company. Under the new policy, all drivers were treated as independent contractors and 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.

The relationship between Dynamex and its drivers was carefully evaluated by the Supreme Court and is essential to an understanding of the Court’s decision. Dynamex obtains its own customers and sets the rates to be charged to those customers for its delivery services. It also
negotiated the amount to be paid to drivers on an individual basis. For drivers who were assigned to a dedicated fleet or scheduled route by Dynamex, drivers were paid either a flat fee or an amount based on a percentage of the delivery fee Dynamex received from the customer. For those who delivered on-demand, drivers were 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 were generally free to set their own schedule but were required to notify Dynamex of the days they intended to work for Dynamex. Drivers performing on-demand work were required to obtain and pay for a Nextel cellular telephone through which the drivers maintained
contact with Dynamex. On-demand drivers were assigned deliveries by Dynamex dispatchers at Dynamex’s sole discretion; drivers received no guarantee of the number or type of deliveries they would be offered. Drivers made pickups and deliveries using their own vehicles, but were generally expected to wear Dynamex shirts and badges when making deliveries for Dynamex, and, pursuant to Dynamex’s agreement with some customers, drivers were sometimes required to attach Dynamex and/or the customer’s decals to their vehicles when making deliveries for the customer. Drivers were required to purchase Dynamex shirts and other Dynamex items with their own funds.   In the absence of any special arrangement between Dynamex and a customer, drivers were generally free to choose the sequence in which they would make deliveries and the routes they would take, but were required to complete all assigned deliveries on the day of assignment.

Drivers hired by Dynamex were permitted to hire other persons to make deliveries assigned by Dynamex. Further, when they were not making pickups or deliveries for Dynamex, drivers were permitted to make deliveries for another delivery company, including the driver’s own personal delivery business. Drivers were ordinarily hired for an indefinite period of time but Dynamex retained the authority to terminate its agreement with any driver without cause, on three days’ notice. And, as noted, Dynamex reserved the right, throughout the contract period, to control the number and nature of deliveries that it offered to its on-demand drivers.

Two individual delivery drivers, suing on their own behalf and on behalf of a class of allegedly similarly situated drivers, filed a lawsuit against Dynamex alleging that Dynamex had mis-classified its delivery drivers as independent contractors rather than employees. The drivers
claimed that Dynamex’s alleged mis-classification of its drivers as independent contractors violated the applicable state wage order governing the transportation industry, as well as various sections of the California Labor Code. The drivers also alleged that Dynamex had engaged in unfair and unlawful business practices.

The trial court ultimately granted class certification to the Dynamex drivers who, during a pay period, exclusively delivered for Dynamex and did not do delivery work for other delivery businesses or for the drivers’ own personal customers. In certifying the class of drivers, the trial
court rejected Dynamex’s contention that in the wage order context, as in most other contexts, the multi-factor standard set forth in the Supreme Court’s earlier decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341  is the only appropriate standard under California law for distinguishing employees and independent contractors.

The Supreme Court affirmed the lower court’s decision rejecting the Borello standard but went further by announcing a new standard to determine a worker’s status.

Employers beware: The Supreme Court, in a unanimous decision, established a three-part test for certifying independent contractors, with the highest hurdle being that the work performed must be outside the core of the company’s business. Unless the hiring entity establishes (1) 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, (2) that the worker performs work that is outside the usual course of the hiring entity’s business, and (3) that the worker is customarily engaged in an independently established trade, occupation, or business, the worker should be considered an employee and the hiring business an employer under the applicable wage orders. The hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee, rather than an excluded independent contractor, for purposes of the wage order.

The Supreme Court offered the following examples to illustrate its ruling:

Example of Independent Contractor — when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business.

Example of Employee — when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company, the workers are part of the hiring entity’s usual business

Example of Employee — when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, the workers are part of the hiring entity’s usual business operation.

Thus, unless an employer can satisfy each of the requirements for independent contractor status set for in the Dynamex ruling, workers will be considered employees and subject to the wage and hour rules set forth in the California Labor Code.

[Author’s Note: On May 2, 2019, in Vazquez v. Jan-Pro Franchising International, Inc., (2019) 923 F. 3d 575, the Ninth Circuit Court of Appeals concluded that the Dynamex decision applied retroactively but that decision has since been stayed pending rehearing. In the meantime, the California state Senate will begin hearings in the fall of 2019 on a bill that will make it harder to classify workers as independent contractors, officially codifying the ruling in Dynamex. Stay tuned.]