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CA Supreme Court Decision Calls for Reevaluation of Worker Classifications

Businesses with employees in California may need to reevaluate whether their workers are independent contractors or employees in light of a recent decision by the California Supreme Court.

The decision, which is sure to impact the continuing debate concerning the legal status of "gig economy" workers, endorsed a more restrictive test for determining whether workers properly can be classified as independent contractors. Notably, the decision comes on the heels of several victories for companies that classified certain segments of their workforces as independent contractors, including one federal court decision that relied almost exclusively on the prior test replaced by this new decision.

In Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County, the California Supreme Court addressed whether a putative class of delivery drivers qualified as employees under a state wage order—a mechanism that sets the minimum wage and other conditions for select industries within the state.

For decades, California courts analyzed this question under what is known as the "Borello test." The test required a court first to consider nine factors in determining whether the alleged employer has the "right to control the manner and means of accomplishing the result desired."

In February, a federal court sitting in California used the Borello test to determine that a group of Grubhub workers were independent contractors and not, as they had claimed, employees. Then, in April, the test was cited—though not relied upon—in a federal decision concerning Uber drivers located in Pennsylvania, finding that the workers were contractors, not employees.

The new decision marks a departure from the analytical framework of these prior cases, directing California courts to apply a more restrictive test, which likely will result in many more workers being classified as employees. Reclassification means that employers must pay employees minimum wage and overtime and must withhold federal taxes and unemployment insurance, as well as provide worker's compensation insurance.

Following Dynamex, courts will find a worker to be an independent contractor if (A) the worker is free from the control and direction of the purported employer in connection with the performance of the work, both under the contract for the performance and in fact; (B) the worker performs work that is outside the usual course of the company's business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company. Under this test—which is used in other jurisdictions and is often known as the "ABC test"—the burden rests on the employer seeking to oppose employee status.

The court's decision was explicitly aimed at expanding the scope of the wage orders, both in light of the history of the orders themselves and economic developments like the growth of the "gig economy." The court was critical of employers attempting to gain what it described as an improper advantage over competitors by misclassifying employees as independent contractors.

All organizations that use independent contractors—often operating in a different state than the employer—should take note of the decision. No matter what a contract between the employer and the worker says, courts, in particular those in California, have shown a willingness to deem the worker an employee. Now, without the multifactor Borello test, companies should assume this will occur with increasing frequency. Therefore, they must take care to create and administer independent contractor relationships with this test in mind.

Copyright © by Ballard Spahr LLP

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About this Author

Meredith Dante, labor and employment lawyer, Ballard Spahr
Partner

Meredith S. Dante represents employers across industries including retail, consumer products, hospitality, financial services, technology, life sciences, health care, manufacturing, and higher education in a broad range of labor and employment disputes. She partners with clients to proactively identify issues and devise legal solutions that are specifically tailored to the client's workforce and business needs. She regularly advises clients in matters involving discrimination, whistleblower complaints and retaliation, wage and hour issues, reductions in force, compliance...

215-864-8132
Christopher Kelly, Ballard Spahr Law Firm, Philadelphia, Labor and Employment Litigation Attorney
Attorney

Christopher J. Kelly is an attorney in Ballard Spahr's Labor and Employment group. Chris has represented both public and private employers in a broad range of litigated matters, including wage and hour, harassment, discrimination, retaliation, whistleblower, breach of contract, unfair competition, and wrongful termination, and employment- and business-related tort claims in both state and federal courts across the country.

Chris has served as lead counsel in a variety of matters and conducted trials to verdict and judgment. He has handled appeals before the New Jersey Superior Court Appellate Division and the U.S. Court of Appeals for the Third Circuit. 

Chris has significant experience serving the legal needs the public sector, higher education, and health care industries. He also has experience providing day-to-day employment counseling. 

Prior to joining the firm, Chris served as a Deputy Attorney General in the New Jersey Attorney General's Office, defending New Jersey public employers against employment-related statutory, constitutional, and tort claims. In addition, he practiced in Los Angeles for six years, initially as a sole practitioner and then as managing partner of a five-attorney firm where he handled California state and federal discrimination and wage and hour matters as well as commercial litigation.

215-864-8249
Christopher Cognato, Ballard Spahr Law Firm, Philadelphia, Labor and Employment Litigation Attorney
Associate

Christopher T. Cognato advises public and private employers on a range of labor and employment issues and represents them in litigation and administrative proceedings. His experience includes cases brought under Title VII of the Civil Rights Act, the Employee Retirement Income Security Act (ERISA), the Americans with Disabilities Act (ADA), Family and Medical Leave Act (FMLA), Fair Labor Standards Act (FLSA), Pennsylvania Human Rights Act, and National Labor Relations Act. He frequently helps clients develop employment policies, including those related to hiring, firing...

215-864-8612