California Supreme Court’s Dynamex Decision – Less Impact Than Meets the Eye?

Since the California Supreme Court’s April 30, 2018 decision in (Dynamex), which set a new standard for determination of employee/independent contractor worker classification in the context of California Wage Orders, there has been a good deal of speculation and prediction about the potentially negative impact of the decision on the Gig economy and the freelancing preferences of younger workers.  However, there are at least three reasons why the impact of the decision will be more limited than its proponents hope and detractors fear.

First, the new standard set forth in Dynamex does not apply to all circumstances implicating categorization of workers as employees/independent contractors.  Rather, as the decision itself repeatedly states, it is limited to worker classifications under California’s Wage Orders.  As such, the new classification standard adopted in Dynamex does not apply to other provisions of the California labor code, state unemployment insurance rules, worker compensation, or state tax system, which continue to apply the three-decade old Borelo test.

Second, regarding the potential impact of Dynamex on the Gig economy, the “B” factor in Dynamex’s new ABC test, seems to preclude freelancers from qualifying as independent contractors, thus going against the tide and trend of young workers preference for freelancing over traditional employment.  In the new digital age, many workers, especially younger ones, prefer the mobility and flexibility afforded by independent contractor positions.  In fact, some studies suggest that by 2020 over 40% of the work force will be freelancing.   A post Dynamex decision by a California federal court suggests that the Gig economy may be able to avoid the reach of Dynamex by articulating a clearly distinguishable definition for their business type.

The California Supreme Court pointed to the federal wage and hour laws known as “the Fair Labor Standards Act (FLSA)” for having its own standard for resolving the employee or independent contractor issue.

Finally, certain areas of the economy, such as transportation of goods, are pre-empted by federal law, which precludes application of Dynamex to workers in these industries.

California Wage Orders set forth certain standards and requirements that apply to  specific industries dealing with various work-related issues involving certain wage, hour and working conditions and requirements.  Regulated by the Industrial Welfare Commission (IWC), there are currently 17 Wage Orders that apply to different industries such as the manufacturing industry (Wage Order 1), Personal Services Industry (Wage Order 2), etc.  Each Wage Order deals with issues such as minimum wage, overtime pay, retaining of records and meal and rest periods.  Whether a worker is classified as an employee or an independent contractor under a Work Order is crucial to businesses, especially those industries whose success is built around the “independent contractor” worker model.

Prior to Dynamex, courts applied the 11 factor Borelo standard to determination of worker status under Wage Orders. The Borelo standard is primarily focused on the business’s “right to control” the worker, along with certain “secondary” factors, including location where the services are performed, provision of tools by the hiring business, among others.  Dynamex replaced the Borelo test with a simpler, three factor “ABC test”.  Under the ABC test, there is a presumption in favor of classifying workers as employees, which the hiring entity can overcome by showing:  “(A) that the worker is free from the control and direction of the hirer in connection with the performance of  the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.”

The B prong of the ABC test enquires into whether the work performed by the worker is in “the usual course of the hiring entity’s business.”  This test is likely to engender the most controversy and dispute, as it aims at the heart of the freelancing model, on which many successful businesses in the Gig economy are built and which many millennials prefer.  However, a recent post Dynamex decision points to a way out for the freelance based businesses.  In Curry, a post Dynamex decision, the issue was whether an employee of a company that leased gas services stations from Shell Oil Products (Shell) was also an employee of Shell under a joint employment theory. Applying Dynamex’s ABC standard, the Curry court concluded that the worker at issue was not in Shell’s “usual course of business” because the worker, as the manager of a gas station leased from Shell, was engaged in the occupation of a station manager, while “Shell was not in the business of operating fueling stations—it was in the business of owning real estate and fuel.”  Curry will likely hearten independent contractor-based businesses such as employment placement agencies and other freelance based entities.

The scope and reach of Dynamex are limited to Wage Orders

In enunciating the new ABC standard, the Dynamex court acknowledged existence of different standards for different statutes implicating employee/independent contractor classification, but attributed any such apparent inconsistency to the purpose of the underling statute.  The California Supreme Court pointed to the federal wage and hour laws known as “the Fair Labor Standards Act (FLSA)” for having its own standard for resolving the employee or independent contractor issue.  The Dynamex court stated that like California, the federal labor codes don’t apply a uniform standard to all federal labor laws implicating worker status.   The California Supreme Court also noted that, like “California wage orders, the FLSA contains a broader standard of employment than that generally applicable in other, non-wage-and-hour federal contexts.” This statement signals the California Supreme Court is content with the application of the narrower Borelo standard to non-Wage Order classifications.  Post Dynamex cases have similarly noted the limitation of the ruling.  For e.g., in Salgado a California Court of Appeal stated that except for claims under a Wage Order, “the common law definition of employee controlled all the other claims, including a claim for reimbursement of business expenses under Labor Code…”

Although billed as a “game changer”, the Dynamex decision will not have the reach or potency that its detractors feared.

Impact of Federal Preemption

Federal preemption laws temper the application of the Dynamex decision to certain industries.  For example, the Federal Aviation Administration Authorization Act (FAAAA) preempts any state law “relating to a price, route, or service” of a motor carrier.  The 1st Circuit Court of Appeals, in the context of applying Massachusetts’ ABC test, has found preemption of the “B” factor of the ABC test as conflicting with FAAAA.  In Coakley the First Circuit Court of Appeal held that the FAAAA preempts the “B” prong of Massachusetts ABC test.  Moreover, in Dilts the Ninth Circuit Court of Appeal recognized that even “broad laws applying to hundreds of different industries,” could be preempted by federal statutes if they have a “forbidden connection with prices, routes, and services.”  In light of this recognition, California courts and agencies may find that many industries are outside the reach of Dynamex’s new standard.

Although billed as a “game changer”, the Dynamex decision will not have the reach or potency that its detractors feared.  First, by its own language and emphasis, the decision is limited to Wage Orders.  Additionally, many participants in the Gig economy will be able to avoid the dreaded B prong of the ABC test but clarifying the definition of their businesses.  Finally, federal preemptions laws temper application of the ruling to many industries.

Dr. Dariush Adli, Ph.D., Esq. is the founder and president of ADLI Law Group. His practice is primarily focused on business and intellectual property litigation, media and entertainment law, real estate, products liability, family law, labor and employment and transportation law. He can be reached at adli@adlilaw.com.