California’s Employee vs. Independent Contractor Tests: The Aftermath of the Dynamex Decision [CASE STUDY]

August 2019

The Aftermath of the Dynamex Decision [CASE STUDY]

Last year, the California Supreme Court delivered a landmark decision in the Dynamex[1] case. This case issued a new test, the “ABC Test,” to determine a worker’s status as an employee or independent contractor. For almost 30 years prior to this decision, California businesses mainly relied on the Borello[2] factors test.

Unfortunately, the Dynamex decision has made the process of hiring and classifying workers more confusing. California businesses must carefully examine their workforce and understand the varying tests for classifying their workers. Some businesses are now reluctant to hire independent contractors because they fear potential lawsuits and potentially having to pay hefty penalties for non-compliance.

We want to help your business understand the recent history of Dynamex and other tests used to establish worker classifications. While this may help clarify each legal test, your unique business should be evaluated by a California labor and employment law attorney to ensure it is in compliance.

California’s Employee vs. Independent Contractor Tests

DYNAMEX’s “ABC Test”

(for wage orders ONLY)

BORELLO’s “Totality of the Circumstances: Factor Test”

(for non-wage order claims)

Presumption: Always start with employee

 

Hiring entity must prove all three elements in order to classify a worker as an independent contractor:

 

A.     The worker is free from the hiring entity’s control and direction in connection with his/her performance of the work, both under the contract for performance of the work and in actually performing the work;

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.

Balance all factors that focus on the “right to control” the manner and means of the performance of the work.

·       Is the person performing the work engaged in an occupation or business distinct from that of the company?

·       Is the work part of the company’s regular business?

·       Who supplies the equipment (instrumentalities and tools)?

·       Is the worker’s skill required for the particular occupation?

·       Is the work supervised by company or does specialist act without supervision?

·       Does the worker make a financial investment?

·       Does the worker have opportunity for profit and loss?

·       What is the length of time for which services are to be performed?

·       How permanent is the relationship – right to discharge at will and without cause?

·       What is the payment method – by time or by job?

·       Do the parties believe they are creating an employer-employee relationship?

[1] Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903.

[2] S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341.

Case Study Example

An accounting firm by the name of Garcia, Williams & Brown LLP (the “Firm”) wishes to hire several workers – (1) accounting assistant, (2) certified internal auditor, and (3) external marketing manager. One of the partners of the Firm, Carol Williams, must decide how to classify each of these new hires.

  1. The Accounting Assistant’s duties are to maintain a general ledger, reconcile payroll hours, help process accounts payable and receivable checks and payments, copy documents, answer phone, assist customers, maintain files and bookkeep. The Firm intends to hire the accounting assistant to work full-time from the Firm’s main office in Irvine, California. The position pays $15 per hour if hired as a non-exempt employee or salary equivalent if hired as an exempt employee.
  2. The Certified Internal Auditor’s duties are to objectively assess a company’s information technology (“IT”) and/or business processes, assess the company’s risks and the efficacy of its risk management efforts, evaluate internal control, and make recommendations on how to improve. The new hire must be a “certified internal auditor,” a certification offered to accountants who conduct internal audits. The Firm would like to hire the certified internal auditor to work part-time from the Firm’s main office in Irvine, California. The position pays $25 per hour if hired as a non-exempt employee or salary equivalent if hired as an exempt employee.
  3. The External Marketing Manager’s duties are to analyze industry trends and the demand for services and create a strategy to market the Firm’s accounting services. The external marketing manager may need to collaborate with sales engineers, financial staff, and advertising companies. The Firm would like to hire the external marketing manager for specific marketing projects, to be paid per project, and would prefer that the external marketing manager own her/his own marketing company.
DYNAMEX’s “ABC Test” BORELLO’s Test
Accounting

Assistant

A – The worker is not free from the hiring entity’s control and direction with the performance of the work.  The accounting assistant will rely on the Firm to perform his/her duties.

B – The worker does not perform work that is outside the Firm’s usual course of business.  The accounting assistant will perform accounting-type work for an accounting firm.

C – The worker is not customarily engaged in an independently established trade, occupation or business.

·       Is the person performing the work engaged in an occupation or business distinct from that of the Firm? No.

·       Is the work part of the Firm’s regular business? Yes.

·       Who supplies the equipment (instrumentalities and tools)? The Firm.

·       Is the worker’s skill required for the particular occupation? No.

·       Is the work supervised by the Firm or does the worker act without supervision? Supervised by Firm.

·       Does the worker make a financial investment? No.

·       Does the worker have opportunity for profit and loss? No.

·       What is the length of time for which services are to be performed? Indefinite.

·       How permanent is the relationship – right to discharge at will and without cause? At-will.

·       What is the payment method – by time or by job? By time.

·       Do the parties believe they are creating an employer-employee relationship? Yes.

Certified Internal Auditor A – The worker is not free from the hiring entity’s control and direction with the performance of the work.  The CIA will rely on the Firm to perform his/her duties.

B – The worker does not perform work that is outside the Firm’s usual course of business.  The CIA will perform accounting-type work for an accounting firm.

C – The worker is not customarily engaged in an independently established trade, occupation or business.

·       Is the person performing the work engaged in an occupation or business distinct from that of the Firm? No.

·       Is the work part of the Firm’s regular business? Yes.

·       Who supplies the equipment (instrumentalities and tools)? The Firm.

·       Is the worker’s skill required for the particular occupation? Yes.

·       Is the work supervised by the Firm or does the worker act without supervision? May act without supervision.

·       Does the worker make a financial investment? No.

·       Does the worker have opportunity for profit and loss? No.

·       What is the length of time for which services are to be performed? Indefinite.

·       How permanent is the relationship – right to discharge at will and without cause? At-will.

·       What is the payment method – by time or by job? By time.

·       Do the parties believe they are creating an employer-employee relationship? Possibly yes..

External Marketing Manager A – The worker is free from the hiring entity’s control and direction with the performance of the work.  The EMM will not rely on the Firm to perform his/her duties.

B – The worker does perform work that is outside the Firm’s usual course of business.  The EMM will perform marketing-type work for an accounting firm, outside of the Firm’s office.

C – The worker is customarily engaged in an independently established trade, occupation or business.

·       Is the person performing the work engaged in an occupation or business distinct from that of the Firm? Yes.

·       Is the work part of the Firm’s regular business? No.

·       Who supplies the equipment (instrumentalities and tools)? Worker.

·       Is the worker’s skill required for the particular occupation? Yes.

·       Is the work supervised by the Firm or does the worker act without supervision? Acts without supervision.

·       Does the worker make a financial investment? No.

·       Does the worker have opportunity for profit and loss? Yes.

·       What is the length of time for which services are to be performed? Per project.

·       How permanent is the relationship – right to discharge at will and without cause? At-will.

·       What is the payment method – by time or by job? By job.

·       Do the parties believe they are creating an employer-employee relationship? Possibly yes.

Under Dynamex, Carol Williams should classify the new hires as: (1) full-time, non-exempt, employee; (2) part-time, non-exempt or exempt, employee; and (3) may classify as employee or independent contractor.

Under Borello, Carol Williams may classify the new hires as: (1) full-time, non-exempt, employee; (2) part-time, non-exempt or exempt, employee, or independent contractor; and (3) part-time or full-time, non-exempt, employee, or independent contractor.

Employment Counsel Can Help You Determine Classifications

Dynamex drastically changed the employment landscape in California. Employment counsel can be your company’s ally to classify your workforce and help you avoid costly litigation. If you have questions about your business’ classifications, contact Straggas Law Group today.

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