Recent Developments in Independent Contractor Compliance under California Law

Jason D’Cruz

By: Jason D’Cruz, Partner at Morris, Manning & Martin, LLP and Shama Barday, Associate at Morris Manning & Martin, LLP

California is known for its hostility towards classifying workers as independent contractors. Two recent developments reinforced this reputation and increase the risks for businesses engaging independent contractors.

Lee v. Dynamex Operations West, Inc.

In April 2005, two plaintiffs filed suit against Dynamex, a same day transportation and logistics company, on behalf of a class of delivery drivers who were converted from employees to independent contractors. The plaintiffs alleged that they were improperly classified as independent contractors because despite the change in their titles, they were still performing the same work for Dynamex without any change in the amount of control exercised over them by Dynamex. The plaintiffs argued that the class members were “employees” as defined in the California Industrial Welfare Commission (the “IWC”) Wage Order No. 9, applicable to the transportation industry.[1] Wage Order No. 9 (and every other Wage Order issued by the IWC) defines “employ” as to “engage, suffer, or permit to work” and “employee” as “any person employed by an employer.”

Dynamex argued against class certification stating that the common law test based on S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989), and traditionally applied by California courts, should govern the inquiry. The focus of the Borello test is on the “right to control” the manner and means by which an individual performs his or her duties. The test also allows consideration of secondary factors, including, among others: whether the work performed is part of the regular business of the employer; whether the employer supplies the instrumentalities, tools, and place of work; whether special skills are required; the individual’s opportunity for profit or loss depending on his or her managerial skill; and whether payment is made based on time or by the job. According to Dynamex, because the Borello test requires an individualized assessment of factors, class certification should have been denied.

The trial court, siding with the plaintiffs, applied the Wage Order’s broader definition of “employee” and certified the class. Dynamex appealed the class certification decision to the California Second Appellate District’s Court of Appeals, which largely upheld the trial court’s decision, but found that the Wage Order definition should only be used for claims that were under the purview of the Wage Orders, such as claims for unfair competition, failure to pay overtime, failure to provide accurate wage statements, and failure to reimburse certain business expenses.[2] For claims that were not brought under the Wage Order, the Borello test should be used. The Court of Appeals remanded the case for the trial court to reevaluate whether class certification was appropriate for the claims that were not based on violations of the Wage Order.

Dynamex appealed the Court of Appeals’ decision and on January 28, 2015, the California Supreme Court agreed to review whether the Wage Order definition of “employee” may be used to certify a class action alleging worker misclassification.[3] If the Court of Appeals decision is upheld, then it will be difficult for employers to continue classifying individuals as independent contractors because “employee” is broadly defined in the IWC Wage Orders. Additionally, it will make class actions alleging worker misclassification more common as the Wage Order definition of “employee” is a brightline test unlike the Borello test which is more suited to an individualized determination.

Assembly Bill 1897

On September 28, 2014, California Governor Jerry Brown signed into law Assembly Bill 1897. This bill created Labor Code Section 2810.3, and went into effect on January 1, 2015. The new law imposes civil liability on a “client employer,” defined as a business that obtains workers to “perform labor within its usual course of business” from a staffing agency or “labor contractor,” for the labor contractor’s wage and hour violations or failure to secure workers’ compensation coverage for contract workers. This new law applies to all businesses with twenty-five or more employees and more than five workers supplied by a labor contractor or staffing agency at any given time, and holds a private business civilly liable for any failure of its staffing agency or labor contractor to pay its employees minimum wage, overtime compensation, or any other legally required wages. Under this law, a client employer who engages a contract worker provided by a labor contractor will be liable for any failure of the labor contractor to properly pay wages to workers or provide workers’ compensation coverage, regardless of whether the client employer was aware of the labor contractor’s wage and hour violations.

Client employers with workers obtained from labor contractors should review their staffing contracts to ensure labor contractors are required to indemnify client employers in the event civil liability is imposed on the client employer. In addition, client employers should ensure labor contractors are properly classifying their workers as employees or independent contractors. Client employers should also review the records of their labor contractors to ensure proof of workers’ compensation insurance and proper payment of wages. However, employers must also be vigilant not to exercise the kind of control over a contract worker that would jeopardize the worker’s classification as an independent contractor.

[1] The IWC is the body charged with regulating wages, hours, and working conditions in California, and has issued seventeen wage orders that cover all non-exempt California employees. The IWC Wage Orders regulate wages, hours and working conditions and are numbered by industry or occupation group.

[2] See Dynamex Operations W., Inc. v. Superior Court, 230 Cal. App. 4th 718 (2014), review granted and opinion superseded sub nom. Dynamex Operations W. v. S.C. (Lee), No. S222732, 2015 WL 358369 (Cal. Jan. 28, 2015).

[3] Dynamex Operations W. v. S.C. (Lee), No. S222732, 2015 WL 358369 (Cal. Jan. 28, 2015)

Legal Disclaimer – The contents of this article are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.