Employee Classification in the Wake of Dynamex
Posted on Nov 11, 2019Changes in Classification of Employees as Independent Contractors
Over the past few years, employee classification has become a more prevalent issue. Technology has advanced such that companies like Uber and Lyft provide a platform for workers to connect with consumers, classifying those workers who use the platform as “independent contractors” instead of “employees.” More and more employers are misclassifying their employees as independent contractors in order to avoid paying unemployment insurance, fair wages, and giving workers their legally entitled rights. Typically, courts look at the economic realities of a situation to determine whether a worker is an employee as opposed to an independent contractor.[1] The traditional test looks to a myriad of factors, including the degree of control an employer exercises over the worker, how the worker is paid, the employer’s right to hire and fire the worker, and whether the performance of the worker’s duties was an integral part of the employer’s business.[2] On September 18, 2019, California Governor Gavin Newson signed a new definition of “employee” into law in the wake of the Dynamex Operations West v. Superior Court decision.[3]
The Dynamex DecisionIn Dynamex, drivers who worked for a delivery services company alleged they had been misclassified as independent contractors.[4] The California Supreme Court found that the “suffer or permit to work” standard set forth in California’s wage orders required a hiring company asserting independent contractor status for a worker to establish it through the three factor “ABC” test instead of the multifactor analysis.[5] The court implemented this test for two primary reasons: first, a multifactor analysis makes it difficult for both employers and workers to determine what category the workers fall into; and second, the multifactor test affords hiring businesses greater opportunity to evade its fundamental responsibilities by structuring the working relationship in such a way to evade the test.[6] The new “ABC” test that the court established requires that a worker be classified as an independent contractor only if they are (A) free from control and direction of the hirer in connection with performance of the work, both in contract and in fact; (B) performing work outside the usual course of the hiring entity’s business; and (C) customarily engaged in independent work.[7] For platform economy businesses, the key factor is (B)–that the work was outside of the usual course of business for the organization. This factor creates an issue for platform economy businesses such as Uber and Lyft because it will be difficult for these companies to allege that drivers perform work outside of the usual course of business, as their business models would not continue to succeed without the drivers.
California Assembly Bill No. 5The California Assembly bill that Governor Newsom recently signed into law codifies the Dynamex decision, making it clear that the state legislature is fighting against worker misclassification.[8] The legislature even declared it was their intent to ensure workers who are currently being exploited through misclassification as independent contractors are given the basic rights and protections they are guaranteed under the law.[9] Considering how technology and the platform economy has been transforming employment in the United States, this bill could have far-reaching ramifications, especially if other states adopt similar worker classifications. With that said, Uber’s counsel has announced that despite the new law, it will still not classify its drivers as employees.[10] In effect, Uber is claiming that its core business is providing a platform for drivers to connect with riders, but the “rideshare” feature in and of itself is ancillary to their business.[11]
Inconsistency with the National Labor Relations Board (“NLRB”)The “ABC” test for classification as an independent contractor that was adopted in the California Bill is not the same as the test endorsed by the NLRB. In fact, while California marches forward with a more expansive definition of “employee”, the NLRB seems to be narrowing it. In SuperShuttle DFW, Inc., the NLRB overruled a previous Board’s more holistic determination examining the typical common law factors, and instead elevated the importance of the “entrepreneurial ability of the worker” factor to new heights when determining independent contractor status.[12] With this overturning of precedent, the examination of the typical common law factors is weighted towards whether the employer afforded significant entrepreneurial opportunity to the worker. If the employer did, then that worker may be designated an independent contractor, allowing employers to skirt the responsibilities they would typically owe their employees, i.e. workers’ compensation, minimum wage, and overtime.
Furthermore, the NLRB has stripped away employer penalties for misclassifying employees. In Velox Express, Inc., the NLRB found that misclassifications of employees as independent contractors do not violate the National Labor Relations Act (“NLRA”).[13] This applies even when the employer demonstrates bad faith, since the NLRB found that such misclassification is not a violation even if it was intentional and motivated by animus against Federal and State law protections, so long as the intention was not to interfere with section 7 rights (most notably the right to organize).[14] Stripping away employer penalties substantially weakens the ability of workers to hold employers accountable for purposefully attempting to attack workers’ rights under the NLRA.
What’s Next?California’s codification of the ABC independent contractor test may spur similar action in other states, pushing them to expand their definition of who is an employee. However, as evidenced in Super-Shuttle and Velox, the NLRB under President Trump’s administration is demonstrably hostile towards expansions of the employee class, so nation-wide change is unlikely to occur until new appointments are made to the Board. Therefore, as long as Trump’s appointees control the NLRB, such protections are unlikely to be enacted on the federal level and must come on a state-by-state basis.
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[1] See Goldberg v. Whitaker House Coop., Inc., 366 U.S. 28, 33 (1961) (adopting the economic reality test to determine if homeworkers were employees).
[2] See Mantei v. Mich. Pub. Sch. Emps. Ret. Sys., 663 N.W.2d 486, 488 (Mich. Ct. App. 2003).
[3] See John Myers, Johana Bhuiyan & Margot Roosevelt, Newsom Signs Bill Rewriting California Employment Law, Limiting Use of Independent Contractors, L.A. Times (Sept. 18, 2019), https://www.latimes.com/california/story/2019-09-18/gavin-newsom-signs-ab5-employees0independent-contractors-california.
[4] See Dynamex Operations W. v. Superior Court, 416 P.3d 1, 5 (Cal. 2018).
[5] Id. at 34–35.
[6] Id. at 33–34.
[7] Id. at 34.
[8] 2019 Cal. Stat. ch. 296.
[9] Id.
[10] Robert W. Wood, It’s Not Just Uber, California Bill Could Transform Tricky Tax and Legal Rules on Independent Contractors, Forbes (Sept. 12, 2019) https://www.forbes.com/sites/robertwood/2019/09/12/its-not-just-uber-ca-bill-could-transform-tricky-tax--legal-rules-on-independent-contractors/#433898244ad1.
[11] Id.
[12] See SuperShuttle DFW, Inc., 367 N.L.R.B. 75, at 11–12 (2019).
[13] See Velox Express Inc., 368 N.L.R.B. 61, at 9 (2019).
[14] Id.