California Supreme Court Adopts "ABC" Test for Independent Contractor Status Under California Wage Orders

Today the California Supreme Court issued its long-awaited opinion in Dynamex Operations West v. Superior Court, in which the court considered the appropriate test to use when determining whether a worker is an employee or independent contractor under California’s various Wage Orders, which impose obligations on employee working conditions like minimum wages, hours worked, and meal and rest breaks.

Historically, courts and the California Department of Industrial Relations, Division of Labor Standards Enforcement, have looked to the multi-factor test articulated in Borello & Sons, Inc. v. Dep’t of Indus. Relations (1989) 48 Cal. 3d 341, a workers’ compensation case, for guidance in the Wage Order context. That opinion held courts should consider factors such as the potential contractor’s investment in tools, the method of payment, the degree of permanence of the relationship, and the parties’ intention regarding the relationship when assessing whether a contracting or employment relationship exists.

Today, the court announced that the Borello factors do not apply to potential employment relationships under California’s Wage Orders. Instead, hiring entities will be required to establish each of three factors in order to prove that an independent contractor relationship, rather than employer relationship, exists (this so-called “ABC” test has been adopted in a handful of other jurisdictions, including Massachusetts):

• The worker is free from the control and direction of the hirer in connection with the performance of the work (both by contract 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 that involved in the work performed.

The opinion leaves open the question of whether the Borello test remains viable for claims brought outside the context of California’s Wage Orders.

The court adopted this test as a practical application of the Wage Orders’ definition of “employ” as “engage, suffer, or permit to work,” a standard that court described as “exceptionally broad.”

This newly articulated test could limit opportunities to classify workers as independent contractors for many hiring entities in California. But it also creates the possibility of new defenses to misclassification claims in some industries. For example, the First Circuit Court of Appeals ruled in 2016 that a Massachusetts law that contained the same prongs as the Dynamex test was preempted by the Federal Aviation Administration Act (FAAA) because it necessarily affected the services and rates of transportation providers. California courts had previously ruled that FAAA preemption was unavailable in state law misclassification claims, but the potential breadth and reach of the Dynamex test opens new avenues for putative employers in the transportation industry, at least, to argue that misclassification claims are preempted by federal law.

Look for further analysis of this important development from Faegre Baker Daniels’ employment litigation team in the near future.