Dynamex Operations W. v. Superior Court and Charles Lee, Real Party in Interest, 4 Cal.5th 903 (Cal. 2018) was a landmark case handed down by the California Supreme Court on April 30, 2018. A class of drivers for a same-day delivery company, Dynamex, claimed that they were misclassified as independent contractors and thus unlawfully deprived of employment protections under California’s wage orders.Dynamex Operations W. v. Superior Court, 4 Cal.5th 903, 914 (Cal. 2018). Their claims raised the question of what the appropriate standard was to determine whether workers should be classified as employees or as independent contractors under California’s wage orders.Dynamex, 4 Cal.5th at 913–14.
In a unanimous opinion, the California Supreme Court held that workers are presumptively employees for the purpose of California’s wage orders and that the burden is on the hiring entity to establish that a worker is an independent contractor not subject to wage order protections.Dynamex, 4 Cal.5th at 916–17. The Court also held that in order to establish that a worker is an independent contractor, the hiring entity must prove each of the three parts of the “ABC test.”Dynamex, 4 Cal.5th at 917. In applying this new test to Dynamex and its workers, the Court found that there was sufficient commonality of interest among the class of drivers with respect to parts B and C of the test to affirm the class certification issued by the California Court of Appeal. The decision inspired public debate and legislative action on this issue, which culminated when the California Legislature passed Assembly Bill 5 ("AB5") on September 11, 2019. The law codifies the Dynamex holding and extends its protections beyond the wage order context.Cal. Assemb. B. 5 § 1 (d).
Legal context In employment law, there is a distinction between workers classified as employees as opposed to those classified as independent contractors. If a worker is classified as an employee, their employer must follow a variety of employment laws that protect the worker.Dynamex, 4 Cal.5th at 912. These include laws governing minimum wages, overtime, meal and rest breaks as well as other working conditions of employers. Employers also need to pay taxes for social security, workers’ compensation, and unemployment insurance as well as payroll and employment taxes. In contrast, businesses that hire independent contractors to complete work, do not have to meet any of these legal obligations or incur related costs because independent contractors are not protected by employment statutes and regulations.
This legal distinction creates economic incentives for businesses to misclassify workers as independent contractors.James F. Morgan, Clarifying The Employee/Independent Contractor Distinction: Does The California Supreme Court's Dynamex Decision Do the Job, 69 Lab. Law J. 4194899 (Sept. 18, 2018). Not only do they save on costs stemming from compliance with employment and tax laws, but they obtain an advantage over their competitors who do not misclassify their workers and thus incur these costs. Misclassification can impose costs not just on workers, but on society at large. As both the federal and California governments have recognized, misclassification deprives governments of substantial annual tax revenues and workers from numerous employment law benefits to which they are lawfully entitled. Recognizing the seriousness of this problem, California has imposed substantial civil penalties for misclassifying workers as independent contractors, particularly for “willful” misclassification.3 Witkin, Summary 11th Agency § 460 – Willful Misclassification of Independent Contractor Status (2019).
The California courts have long grappled with the appropriate standard for determining whether a worker is properly classified as an employee or an independent contractor for the purpose of California’s employment laws. At common law, the employment relationship was determined by the degree of control over the details of the work being performed.S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341, 350 (Cal. 1989).
The California Supreme Court built on this common law foundation when it issued S.G. Borello & Sons, Inc. v. Department of Industrial Relations, its seminal case on the subject.S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (Cal. 1989) (en banc). In Borello, the California Supreme Court found that while control over the work performed was the “most significant” factor in determining whether there was an employment relationship under an employment statute, it could not be applied “rigidly and in isolation.”Borello, 48 Cal.3d at 350. The Court went on to identify other “secondary” factors that should be considered as well.Borello, 48 Cal.3d at 351. Among these were (1) whether the worker is engaged in a distinct occupation or business; (2) whether the type of work is usually done at the direction of a principal; (3) the level of skill required to perform the occupation in question; (4) whether the hiring entity or the worker provides the place of work, instrumentalities, or tools to do the work; (5) the length of time for which the services are performed; (6) whether the worker is paid by time or by job; (7) whether the work is part of the usual course of business for the hiring entity; and (8) whether or not the parties believe that their relationship is one of employer and employee.38 Cal. Jur. 3d Independent Contractors § 3. Applying these factors is a fact-specific inquiry, with courts looking to the totality of the circumstances, rather than any one particular factor.
In 2010, in Martinez v. Combs, the California Supreme Court offered some additional interpretative gloss on the definition of “employ” in the context of California’s wage orders.Martinez v. Combs, 49 Cal.4th 35 (Cal. 2010). Wage orders are “quasi-legislative regulations” enforced by the California Department of Industrial Relations, Division of Labor Standards Enforcement.Cal. Civ. Prac. Employment Litigation § 4:20.See generally California Labor Code §§ 1173, 1178, 1178.5, 1182, 1185. The orders govern wages and hours as well as basic working conditions like meal and rest breaks on an industry-wide basis.Dynamex, 4 Cal.5th at 913, n.3. In Martinez, the California Supreme Court considered an action brought by a worker, alleging that his employer had violated a wage order applicable to the industry in which he worked.Martinez, 49 Cal.4th at 42. In considering whether the worker was an employee and thus covered by the applicable wage order, the Court found that the wage order—not the common law—defines the employment relationship in this context.Martinez, 49 Cal.4th at 62. So, the Court looked to the wage order’s text to find three alternative definitions of employment for the purpose of the workers’ action: “(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.”Martinez, 49 Cal.4th at 64.
Factual background The defendant in this case, Dynamex, was a corporation that offered same-day courier and delivery services nationwide, including in California. Its customers ranged from members of the public to large businesses like Home Depot. Dynamex solicited customers and set the rates for its delivery services.
Dynamex enlisted drivers to complete the pickups and deliveries at the core of its business. Before 2004, Dynamex classified all of its California drivers as employees and compensated them in accordance with California’s wage and hour laws. But starting in 2004, the company chose to classify all of its drivers as independent contractors in order to achieve cost savings associated with avoiding the obligations that those laws impose.
Under this policy, Dynamex hired drivers to provide delivery services for an indefinite period of time, but could terminate this arrangement at any point as long as Dynamex provided three days notice.Dynamex, 4 Cal.5th at 918. Drivers could set their own schedule, but had to notify Dynamex in advance of the days they wished to work. On these days, a Dynamex dispatcher would assign available deliveries to drivers, although Dynamex did not guarantee drivers the number or type of deliveries in advance. Drivers could reject delivery requests, but were required to communicate quickly with the dispatcher if they wished to do so.
Compensation depended on the type of delivery, but drivers were either paid a flat fee per delivery or a percentage of the delivery fee paid by the customer. Not included in drivers’ compensation were various tools of the trade, which drivers used to complete their deliveries and were required to purchase themselves. Drivers were required to purchase delivery vehicles as well as any related transportation expenses such as gas, vehicle maintenance, or insurance on their vehicles. Drivers were also required to purchase a Nextel cell phone to communicate with dispatchers. In addition, they were required to purchase Dynamex shirts and badges and wear them while completing deliveries.
Procedural background In January 2005, Charles Lee, the initial named plaintiff in this case, entered a written agreement with Dynamex to complete deliveries as an independent contractor. After completing 15 days of work for Dynamex, Lee stopped providing delivery services for Dynamex. Three months later, on April 15, 2005, he filed a class action suit against Dynamex in the Los Angeles County Superior Court on behalf of himself and all other similarly-situated Dynamex drivers.Dynamex, 4 Cal.5th at 919.Complaint, Lee v. Dynamex, Inc., No. BC 332016, 2005 WL 6205073 (Cal. Superior Ct. Los Angeles Cnty, July 14, 2005) He alleged that Dynamex had misclassified its drivers as independent contractors, depriving them of overtime compensation, itemized wage statements, and compensation for business expenses as required by California’s wage orders.
After the Superior Court initially denied class certification and the Court of Appeal reversed, the Superior Court certified a class of approximately 184 drivers who had performed pickup or delivery services for Dynamex between 2001 and the date of the certification order, were classified as independent contractors, and who had responded to questionnaires issued to current and former Dynamex drivers in a timely manner.Dynamex, 4 Cal.5th at 920. The class excluded those among this group who employed other drivers or who performed delivery services for their own business or for another company.Dynamex, 4 Cal.5th at 921.