Dynamex Just Blew-Up Everything Employers Knew About Independent Contractors

Q.      I own a small gym and proudly offer the largest variety of work out classes in town. I operate the gym by contracting with individuals experienced in the various classes my gym offers. These instructors select their own class material to teach and set their own class schedules. I previously met with an attorney to ensure that the these instructors were properly classified as independent contractors, and not employees. Can I continue to rely on the opinion that my business model satisfies the California independent contractor standard?

A.      Unfortunately for California business that operate by using independent contractors, the California Supreme Court recently restructured the independent contractor standard, referred to as the “ABC Test” and it is much less flexible than the previous balancing test established in Borello.

On April 30, 2018, the California Supreme Court issued its ruling in Dynamex Operations West, Inc. v. Superior Court, completely overhauling (but not overruling) the independent contractor standard previously set forth in the seminal case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341.

The Supreme Court ruled that the test for determining the proper classification of an independent contractor requires a hiring entity to establish all of the following factors: A) 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) The worker performs work that is outside the usual course of the hiring entity’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 hiring entity.

Part A: Free From Control and Direction
This prong looks at the degree of control the company has over the individual. If the individual is subject to the same type of control a business typically exercises over employees, then the individual is not an independent contractor. For example, setting the person’s schedule, dictating the way in which the person performs the work, or the location of the work is performed would . Prior to Dynamex, this was the principal factor considered in the Borello balancing test. Now, it is considered equally as important as prongs B and C of the ABC test.

Part B: Outside the Usual Course of Business
This prong requires the individual to perform a type of work that is outside of the company’s ordinary business, i.e., is the individual performing a service for the company, or would the individual be viewed by others as an employee of the company. This prong is a significant deviation from the Borello standard and as a practical matter will prevent the use of independent contractors for most companies, except where the person’s work has no tangible connection to the hiring entity’s business. The Dynamex case uses the example of a retail store that uses the services of a plumber – the plumber is an independent contractor – versus a clothing manufacturer that uses a work-at-home seamstress, or a bakery that uses cake decorators, both would be an employee under the ABC Test.

Part C: Independent Trade
This prong requires that the individual is engaged in its own independently established business, rather than being a person assigned the independent contractor status by the company. Dynamex held that this requirement could be satisfied by showing the individual markets their own business and such as obtain their own business license, and performing their service for multiple entities.

Notably, the new ABC Test only applies to Industrial Welfare Commission Wage Orders. The California Supreme Court did not make any rulings about whether this test would also apply to other wage and hour laws, such as claims for reimbursement for business expenses, workers’ compensation or unemployment, but the opinion suggests such laws will remain subject to the Borello standard (click here to see our July, 2015 blog post about NFL cheerleaders for a summary of Borello standard/balancing test factors).

In sum, those California businesses using independent contractors should review these relationships to make sure they comply with the new standard, and be sure the answer to all three parts of this new test is “yes.” As always, the employment team at Baker Manock & Jensen would be happy to assist your business with any questions or concerns this new test might bring.

ALERT: A Valley business and a cautionary small business tale

It was recently reported that a local Valley restaurant has been ordered to pay employees $150,000 in back wages and penalties.[1]  This is another cautionary tale of how employment related lawsuits and government enforcement can lead to extensive liability and shudder small businesses in struggling areas.  While the newspaper article seems to suggest that simple steps can be taken to avoid liability for wage and hour violations, this is not always the case.  Even attentive and cautious business owners can get sucked into lawsuits or government enforcement actions.  Indeed, back in 2013 an article in the Huffington Post stated that wage and hour lawsuits had risen 432 percent over the last 20 years![2]

The last three years seem to have shown no signs of slowing down – particularly in California – where wage and hour laws are even more employee friendly than Federal laws.  While some employer errors are obvious and easy to correct going forward, others are not.  The number and technical nature of wage and hour laws make it increasingly difficult for employers to maintain compliance. Perhaps what is even more concerning is that a company does not need to commit an extensive amount of violations to have liability reach six (or even) seven figures.  The large nature of these figures stems from the three year statute of limitations attached to most wage violations.  Furthermore, a violation of one statute usually means that an employer violated other statutes, sometimes for the same exact conduct.  Additionally, penalties are often imposed in addition to back pay.  And, once a violation is discovered, the only way to correct it is to pay the employees for every violation and penalty that took place during the previous three years.

A common strategy for Plaintiff’s and former employees is to indicate that they worked off the clock.  This is extremely problematic because even companies that keep very good records are left defending a lawsuit that is “employer said versus employee said.”  While ultimately there may need to be legislative changes to ensure that well meaning employers are not put out of business by wage and hour lawsuits, there are some suggestions that employers are encouraged to take.  These suggestions are not fail safe and will not mean an employer cannot still be sued or brought into a government enforcement action for an alleged violation, but they do put the employer in the best defensive posture when one occurs.

  • Make sure your exempt employees are truly exempt:  Simply paying your employee a salary does not mean they are necessarily exempt from overtime and meal breaks.  In order to be exempt, employees must meet both the salary test and the duties test.  Because the salary test is based on a multiple of minimum wage, employers must continually review their exempt employees salaries to ensure compliance.  Currently, in addition to meeting the duties test, an employee must be paid at least $41,600 per year to be an exempt employee.
  • Ensure employees are encouraged to take meal periods/rest breaks:  Often the allegation in a wage and hour case is that employees did not receive their meal and rest period.  Generally Employees are entitled to a meal period every 5 hours and a rest break for every 4 hours worked (or major fraction thereof).  Make sure an employee’s workload does not prevent them from taking their meal and rest breaks.  If an employee misses a meal period, simply pay the one hour pay penalty in the next pay period.
  • Make it easy for an employee to correct their time:  If there is an error on the time clock (or an employee forgot to clock in), make sure there is an mechanism where an employee can easily make sure their pay accurately reflects the time they actually worked.
  • Pay all compensable time:  This concept is getting trickier all of the time.  The increase in use of technology and mobile devices makes it difficult to ensure no work is conducted after the employee leaves the workplace.  To that end, employees should be informed that they are not to conduct work when they are not clocked in and that if they do conduct work after hours, they make sure and record it the next day.  Employers should be very careful about giving non-exempt employees mobile devices or after hours access to the computer system.
  • Be wary of classifying somebody as an independent contractor: Simply calling an individual an independent contractor does not mean that they are one.  Indeed, an individual performing work is presumed to be an employee.  In order for an individual to be properly classified as an independent contractor he or she must meet an extensive test.
  • Keep accurate time records:  Time records and wage statements will be an employer’s main line of defense in a wage and hour action.  Do not automatically deduct meal periods, and be wary of hand written timesheets that always reflect nice round hours.
  • Have policies which accurately reflect the law and have employees acknowledge the same: An employer’s next best defense, other than keeping accurate pay records, is to have strong policies that inform the employees of their rights.  It is more difficult for an employee to claim that the employer prevented an employee from taking a meal and rest break when the employers policies say the exact opposite.
  • Get an employment law attorney involved early:  Obviously prophylactic measures are better than a defense.  It is better not to have a violation than to defend against a lawsuit.  An attorney or HR professional can help set up your business to prevent violations from occurring in the first place.  But, if an employee does make a claim, an attorney’s early involvement can save an employer a significant amount of funds through early resolution.

[1] http://m.hanfordsentinel.com/selma_enterprise/news/selma-leaders-react-to-wage-violations-case/article_832efea5-80ae-5a69-a174-9cc7fd815d25.html?mobile_touch=true.

[2] http://www.huffingtonpost.com/2013/05/14/wage-and-hour-lawsuits_n_3271978.html.