The Unpost, Post: Dynamex and the Construction Industry
It’s been three months since the California Supreme Court issued its landmark decision in Dynamex Operations West, Inc. v. Superior Court, Case No. S222732 (April 30, 2018) and I’ve had a couple of readers (perhaps my only two) ask whether I was going to write about the decision.
I’m not. Well, obviously, that’s not quite true if you’re reading this. Rather, I’ll tell you why I’m writing about not writing about the decision.
Dynamex is certainly an important decision and one that will likely be cited for decades to come. In short, Dynamex changed the nearly 30-year old test, first elucidated in S.G. Borello & Sons Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, for determining whether a worker is properly classified as an independent contractor or an employee.
When Borello was decided in 1989, the California Supreme Court set forth a multi-factor test, also known as the “economic realities” test, for determining whether a worker was properly classified as an independent contractor, or whether the worker was really an employee for whom payroll taxes would be required to be deducted, meal and rest breaks provided, overtime paid, etc.
Under the economic realities test, courts would look at various factors, most traditionally cited as 11 different factors, but sometimes expanded to include more and sometimes collapsed to include fewer, and would look at, among other things, whether the person performing services was engaged in an occupation or business distinct from that of the hiring party; whether or not the work performed was part of the regular business of the hiring party; and, most significantly, whether the hiring party had control or the right to control the worker as to the work performed and the manner and means in which it was performed, also known as the “control” test.
Other than the control test, no single factor of the Borello economic realities test was determinative (which we lawyers and judges call a “balancing test” and others simply call “subjective,” although other more colorful words have been used) of whether a worker is an employee or an independent contractor. As such, it gave both hiring parties and workers leeway to argue, and litigate, over whether a worker was an independent contractor (usually argued by the hiring party) or an employee (usually argued by the worker).
The Dynamex Decision
When the Dynamex decision came out it shocked not only the business community (in particular, “gig” economy companies like Uber, Lyft and Amazon Prime Now, which classify their drivers and delivery persons as independent contractors) but the legal community as well, who thought that after nearly 30 years under Borello, nothing (much) would change. But, boy, were we wrong.
In Dynamex, the Supreme Court threw out the 11-factor Borello test and adopted a much simpler, yet far stricter, “ABC” test. Under the new ABC test, hiring parties must now satisfy “all” (Yes, all. Remember fondly the days of “balancing?”) three prongs of the ABC test:
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 (ok, so this is similar to the Borello “control test,” but read on);
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 gig economy companies like Uber, Lyft and Amazon Prime Now, this is going to be a tough pill to swallow, particularly Test C, since most of their drivers and delivery persons don’t drive and deliver independently apart from these companies. However, for other businesses, like professional consulting firms, of which there are many in the construction industry, who hire other professionals (e.g., engineers) on a contract basis when they get busy (and many of whom have their own professional consulting businesses that would likely easily satisfy Test C), it’s Test B that’s going to be difficult, since they are arguably not performing work that is outside the usual course of business of the hiring professional consulting company.
Why Dynamex Isn’t a Particularly Big Deal for the Construction Industry
Although the California Supreme Court made clear in Dynamex that its decision was being made in “one specific context” only, namely, whether workers should be classified as employees or as independent contractors “for purposes of California wage orders,” don’t let the Supreme Court’s modesty fool you. If a worker is found to be an employee, he or she is likely going to be found to be an employee for all purposes (e.g., payroll taxes, meal and rest periods, overtime, workers’ compensation, etc.).
However, apart from professional consulting firms, Dynamex isn’t a particularly big deal for the construction industry. Why? Because architects, engineers, contractors, subcontractors, material suppliers and equipment lessors, each of whom who are usually hired as independent contractors, are in fact independent contractors under the ABC test. They operate independently in so far as their scope of work is concerned, the work they perform is outside the usual course of the hiring party’s business (I would say this is so even in the case of subcontractors working for a general contractor), and they are almost always customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
If Dynamex is a problem for anyone in the construction industry, it’s the smaller contractor, who hires workers as “independent contractors” in order to avoid having to pay for workers’ compensation insurance. But, I would argue, these contractors were likely already violating the law before Dynamex was decided, because Labor Code section 2750.5 already provides “any person performing any function or activity for a [contractor’s] license is required . . . shall hold a valid contractors’ license as a condition of having independent contractor status.”
2 Responses to “The Unpost, Post: Dynamex and the Construction Industry”
Hi Garrett, thanks for responding to your loyal reader(s)! I think you hit the nail on the head – Dynamex does not change the employment landscape for contractors much, in light of the stricter standards set in CLC 2750.5.
I am, though, waiting for the other (my) shoe to drop: “However, apart from professional consulting firms, Dynamex isn’t a particularly big deal for the construction industry.” I’m not too concerned about an action from a sub-consultant. It’s the EDD (and the IRS riding on their coattails) that frightens me. The prospect of being assessed imputed withholding, payroll taxes and other p/r burdens on consultant fees in prior years is daunting.
Have you heard any rumblings from Sacramento about Dynamex-related enforcement initiatives?
Ha! Thanks Dave. I’ve heard no rumblings from either EDD, Franchise Tax or the Workers Comp Appeals Board, although the chips are still falling, and will likely continue to fall for some time to come. On one hand, the Supreme Court stated that it’s decision was limited to DIR “wage orders,” so EDD and other agencies may (and probably could) stick with the Borello Test. Although one could easily surmise that this could cause consistency problems, and even conflicts, if a hiring party is considered an employer of a worker in certain respects but not in others. For example, what if a hiring party was considered an employer for purposes of wage and hour requirements, but not found to be an employer and not required to do any withholdings for tax purposes? Perhaps that’s possible without ramifications, but its certainly messy, and would seem to be prone to problems.