The Story Thus Far

As outlined in a previous blog article, the decision in Dynamex Operations v. Superior Court will be extremely important for all companies that use independent contractors, especially those in the emerging “gig economy.” Misclassifying workers can have painful consequences, involving not only liability for unpaid wages and employee benefits but also statutory penalties for each violation considered “willful.”

The Issue

In agreeing to review the case, the California Supreme Court defined the issue on appeal as whether, in a misclassification case, a class may be certified based on the expansive definition of employee as outlined in the California Wage Order language construed in Martinez v. Combs (2010), or on the basis of the common law test for employment set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989). In short, the California Supreme Court focused on whether to continue using the Borello test and on what test, if any, to apply instead.

The definition of employment identified in the California Wage Orders is broader than the prior common law test. California’s Wage Orders define “employ” broadly to mean “to engage, suffer or permit to work.” In contrast, Borello focuses instead on a multi-factor balancing test that depends on the unique facts of each situation and that is more likely to recognize the existence of an independent contracting relationship.

Oral Argument

Dynamex Operations Goes First

In its opening argument, Dynamex praised the Borello test as a tried and true California rule and warned against the danger that uncertainty in the classification of workers would pose to California’s booming “gig economy.” Dynamex raised concerns with any judicial adjustment to the definition of employment that would usurp the legislature role.

Justice Kruger, however, wondered whether judicial adoption of a bright-line rule would not be more instructive for employers, and suggested, as a possibility, adopting the ABC test followed in such jurisdictions as New Jersey and Massachusetts. The ABC test says that three conditions must all concur for a worker to be an independent contractor: (1) freedom from actual control over the work, (2) work beyond the usual course of business and off company premises, and (3) engaging in an independent trade. Unless A, B, and C all concur, then the worker is an employee.

Chief Justice Cantil-Sakauye raised an additional response to Dyanamex’s plea to leave this issue to the Legislature: if the ABC test is a stricter version of the Borello test, then why should the Supreme Court be precluded from adopting a new version of the test to ensure clarity in enforcement when, after all, it was the Supreme Court that had adopted the Borello test in the first place? Finally, Justice Kruger and Dynamex had a robust discussion about adopting a modified rule, where the ABC test would govern for some Labor Code provisions, but a different test may apply to others. Dynamex opined that this result would be confusing for employers and might result in individuals being employees for some purposes but independent contractors for others.

Aggrieved Independent Contractors Respond

In their responsive argument, the workers portrayed what they saw as the sorry plight of California independent contractors. The workers called independent contracts the new “serf-class”: people who work hard while receiving none of the California Labor Code’s basic employee benefits. They argued that the court should adopt a new, broader definition of employee to protect workers from harm. The workers seemed open to several outcomes, including (a) a broader definition for some California Labor Code provisions, (b) the definition outlined in the state’s Wage Orders, or (c) any other new employment test that the California Supreme Court might come to favor.

Justice Liu seemed skeptical about a broader test. He referred to an “Amazon Analogy.” Although most people know Amazon sells goods online, many people also view Amazon Prime (with its delivery services) as within Amazon’s usual course of business. Justice Liu then asked: if the Justices were to adopt a strict interpretation of the ABC test, at what point would Amazon be considered a shipping business, meaning that all drivers who ship Amazon Prime goods would be employees of Amazon under the second ABC prong? This analogy caught the attention of Justices Cuellar and Justice Chin, who both seemed to appreciate how complicated, and blurry, a new test could be.

Dynamex Makes A (Brief) Comeback

In its rebuttal, Dynamex took up Justice Liu’s “Amazon Analogy” to argue why a flexible test is needed to ensure just results. Two justices followed up. The first was Justice Liu, who asked whether other jurisdictions have applied the ABC prongs strictly. The second was Justice Chin, who closed oral argument with a pointed question that represents the concerns of many observers: which employment test best fits the modern economy? Dynamex responded that the body of developing case law as well as the uniformity of Borello’s application has suited California well and that it provides all of the factors needed to fully determine employment relationships.

Our Crystal Ball

Although one cannot read the minds of seven justices, we sense the court will likely reject the call to leave this matter for the legislature and will lean instead toward a judicially fashioned test that, in the view of most justices, will best fit the needs of the modern economy. The court’s decision is expected within the next 90 days.

As always, we will remain vigilant and on the scene. Look for more updates about this case as they come out and in the meantime do not hesitate to reach out to your friendly neighborhood Seyfarth attorney for guidance or with any questions you might have.

Co-authored by Robert S. Whitman and Robert T. Szyba

New Jersey employers now have an answer to a question that had previously been mired in uncertainty:  What test is used to determine whether an individual is an employee or an independent contractor under state wage and hour laws?

In Hargrove v. Sleepy’s, LLC, the New Jersey Supreme Court, answering a question certified by the U.S. Court of Appeals for the Third Circuit, held that the “ABC Test,” taken from the New Jersey Unemployment Compensation Law, applies. Under that test, a worker is presumed to be an employee unless three elements—listed in subsections A, B, and C of the key section of the statute—are met.

Those factors are:

(A) the individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact;

(B) the service is either outside the usual course of business for which such service is performed, or such service is performed outside of all the places of business of the enterprise for which such service is performed; and

(C) the individual is customarily engaged in an independently established trade, occupation, profession, or business.

Unless all three criteria are satisfied, the worker will be deemed an employee.

The plaintiffs in Sleepy’s were delivery drivers who sued under the Employee Retirement Income Security Act (ERISA), the Family and Medical Leave Act (FMLA), New Jersey Wage Payment Law (as well as the state wage laws of New York, Massachusetts, Maryland, and Connecticut), and for breach of contract. They sought rescission of their independent contractor agreements and reformation of their contracts for employment, admission into Sleepy’s ERISA-governed benefit plans, damages for interference with their alleged FMLA benefits, and damages for allegedly unlawful wage deductions and offsets.  Sleepy’s moved for summary judgment on grounds that the workers were independent contractors.  The U.S. District Court agreed, holding that the facts “overwhelmingly show[ed] that the plaintiffs were independent contractors” and thus had no viable employment claims.  The court utilized the so-called “common law test” in its analysis, following the U.S. Supreme Court’s lead in Nationwide Mutual v. Darden, an ERISA case.

Considering the question after certification from the Third Circuit, the New Jersey Supreme Court noted that, of the various tests for independent contractor status, the ABC Test was the most expansive in favor of employment status, as it is the only such test that begins with the presumption that the worker is an employee and puts the burden on the employer to establish otherwise.  The test was also advocated by the state Department of Labor and Workforce Development, which uses it in administrative determinations under the Wage and Hour Law and in unemployment insurance matters.  The Court stated that, in adopting the test, it sought to foster predictability in employment determinations and greater consistency among the state wage and hour laws.  Nonetheless, it recognized that the test differs from the “economic realities” analysis used under the Fair Labor Standards Act and thus could create inconsistent results under state and federal law in New Jersey.

For New Jerseyans, the bar for employment status under the state’s wage and hour laws has been lowered.  Garden State companies that use independent contractors now run a greater risk than before of having those contractors deemed employees.  Because the (alleged) employer bears the burden of establishing independent contractor status, which is distinctly different from applicable federal law, companies should take this opportunity to carefully assess their existing contractor relationships to ensure that these workers are properly classified.