Independent Contractor Alert! CA Supreme Court Drops a Bomb on the IC Business Model

by gspencermynko

Using Independent Contractor Drivers May Now Be Impossible In CA.┬áCalifornia Trucking Companies Who Use Independent Contractor Truck Drivers Are Probably Now Breaking the Law. Here’s what California Trucking Companies must know about the CA Supreme Court’s bombshell ruling on independent contractors.

California is now probably the most hostile jurisdiction in the nation for independent contractor status. The California Supreme Court abandoned decades of common law jurisprudence, literally throwing it in the trash, and adopted the so-called “ABC” test as used in Massachusetts (A state known to be very hostile toward the use of independent contractors). Despite the fact that other jurisdictions are moving toward a more commonsense approach regarding the independent contractor business model, The California Supreme Court seems to have made motor carrier’s use of independent contractor truck drivers impossible.

The California Supreme Court issued a landmark decision in Dynamex Operations West v. Superior Court, No. S222732, in which the Court chose to essentially scrap the nearly 30-year old test for determining whether a worker is an employee or an independent contractor for claims asserted under California’s Wage Orders.

Indeed, trucking companies that were in compliance with the law before April 30, are probably acting illegally today. The ruling in Dynamex is so broad and sweeping, that if you are a motor carrier and you have hired a truck driver, that truck driver is your employee. Period. No exceptions.

Perhaps you are wondering what this means. Consider these points:

They own their own equipment: doesn’t matter

They have been working as Owner-Operators for years: doesn’t matter

They can accept or reject loads as they please: doesn’t matter

They can drive for other companies whenever they want to: doesn’t matter

They are responsible for their insurance, maintenance, and fuel: doesn’t matter

They are paid on load per load basis, with no guarantee of a minimum number of loads: doesn’t matter. Even if the driver only hauls one load and you never work with that driver again, that driver was your employee for that one load.

They have their own authority: doesn’t matter, if they’re using your authority to haul the load.

They are a corporation or LLC: doesn’t matter. Whoever is in the driver’s seat is your employee.

The owner operator is a professional truck driver who saw an opportunity to make money in trucking, and went out and purchased a truck: doesn’t matter

The owner operator can enjoy profits or suffer losses depending on how hard and efficiently he or she works: doesn’t matter

The Owner-Operator wants to be an independent contractor: doesn’t matter. What the driver wants is not relevant.

The Owner-Operator and Motor Carrier have in place a written contract where they refer to each other as independent: doesn’t matter

Let me explain the nature of this armageddon.

The Facts:

“Dynamex is a nationwide same-day courier and delivery service that operates a number of business centers in California. Dynamex offers on-demand, same-day pickup and delivery services to the public generally and also has a number of large business customers-including Office Depot and Home Depot-for whom it delivers purchased goods and picks up returns on a regular basis. Prior to 2004, Dynamex classified its California drivers as employees and compensated them pursuant to (CA) wage and hour laws. In 2004, Dynamex converted all of its drivers to independent contractors after management concluded that such a conversion would generate economic savings for the company. Under the current policy, all drivers are treated as independent contractors and are required to provide their own vehicles and pay for all of their transportation expenses, including fuel, tolls, vehicle maintenance, and vehicle liability insurance, as well as all taxes and workers’ compensation insurance.” Dynamex Operations West, Inc. v. Superior Court, 2018 Cal. LEXIS 3152.

The (New) Law:

The California Supreme Court has rejected the independent contractor test as laid out in the case S. G. Borello & Sons, Inc. v. Department of Industrial Relations. As many of my readers know, the “Borello factors” were used by courts to determine whether a worker was an employee or independent contractor. The Borello control test, which applied multiple factors to the determination of whether a worker qualifies as an independent contractor. This multi-factor test, where no single factor controlled the determination of IC status, has been rejected and the California Supreme Court adopted a rigid “ABC” test for California courts to use when determining IC status.

Here’s what the court said:

The Burden is on the Employer.

The Court interpreted California’s wage precedents and policy as placing the burden on the business to prove that a worker is an independent contractor rather than an employee, otherwise the worker will be presumed to be an employee.

The ABC’s of Misclassification.

“The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (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 the work and in fact; and (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 that involved in the work performed.”

If the hiring business fails to prove any one of the three elements, a worker will be determined to be an employee and not an independent contractor as a matter of law. The Court’s ruling specifically applies to claims stemming from California’s Wage Orders, but the Court left open whether this test would also apply to other statutes.

Under the ABC test, a worker can properly be treated as an independent contractor “only if the worker is the type of traditional independent contractor-such as an independent plumber or electrician-who [c]ould not reasonably [be] viewed as working in the hiring business.” This kind of truly independent contractor would be “realistically understood, instead, as working only in his or her own independent business.”

Part “A” of the test is similar to the “Right of Control” test used in Borello.Factor “A” of the ABC Test, which requires that the worker must be “free of the control of the hiring entity in the performance of the work,” is more or less a restatement of part of the Borello control test, and can be based on a myriad of related factors evidencing control of the employer over the worker’s performance of work, including whether the worker supplies his own tools or controls the specific details of his work, without interference by the hiring entity.

Part “B” of the ABC Test, mandates that in order to be considered an independent contractor, a worker must “perform work that is outside the usual course of the hiring entity’s business.” To illustrate the meaning of the “usual course of business,” the Supreme Court gave the example that “when a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having “suffered or permitted” (the California law definition of employment) the plumber or electrician to be working as its employee.

“On the other hand,” the Court said, “when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company,” or “when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes,” the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees” and not as independent contractors.

I think its clear how Part “B” will be extraordinarily difficult for trucking companies to satisfy.

Part “C” of the ABC Test, which requires that the workers “must be customarily engaged in an independently established trade, occupation or business of the same nature as the work performed,” requires a showing that the worker has “independently made the decision to go into business for himself or herself.” Such workers would be expected to have taken “the usual steps to establish and promote his or her independent business,” for example through “incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.”

Parts A and C are not particularly challenging, but Part B may represent an insurmountable hurdle for trucking companies to satisfy. Trucking companies may try to claim that they don’t actually do any trucking, and rely on independent contractors to handle the actual delivery of freight – in other words, trucking companies may try to make the pitch that when dealing with owner operators, they are acting more like brokers than trucking companies. But I think that argument has about a snowball’s chance in hell in California. For example, I can see Uber trying to make the case that they are simply a technology company connecting willing drivers with willing passengers. The problem is that “riding” is the core of their “ride-share” business, just like “trucking” is the core of a trucking company’s business.

Will the Federal Government take control and take on the states in trucking jurisdiction matters?

Current legislation in the US Congress, known as the Denham Amendment, offered by Rep. Jeff Denham (R-Calif.) and two other lawmakers, would exempt carriers from complying with state laws that require employers to provide paid meal and rest breaks to employees. It also would preempt state rules on misclassification of truck drivers. Most of the attention on the Denham Amendment is focused on California state laws, and court decisions stemming from California-centered litigation. The bill has passed in the House of Representatives, and will move on to the Senate for consideration.

Unless the U.S. Congress and President Trump take control of interstate trucking, via the Denham Amendment (possible), or the California legislature and Governor step in and exempt the trucking industry from the ABC test (uhhh…not so possible), Dynamex is now the law of the land in California. Stay tuned.