ABC Standard for Determining Employment Relationship Does Not Apply to Labor Code Claims

The San Diego division of the Fourth District Court of Appeal has ruled that the ABC test for employment established by the Supreme Court's Dynamex decision is limited to claims under California's wage orders. In Garcia v. Border Transportation Group, LLC, Case No. D072521 (10/22/2018), the Court ruled that a plaintiff's claims for (1) failure to pay overtime under Labor Code section 510, (2) waiting time penalties under Labor Code section 203, (3) Unfair Competition Law claims based on those violations, and (4) wrongful termination in violation of public policy were governed by the factors established in the Borello decision.

Garcia was a driver for a cab company that owned 30 of the 45 permits issued by the City of Calexico for taxicab service. To drive a taxicab, a person had to obtain a City driver's permit, which could only be used while employed by an identified cab company. To work for a different cab company, the driver would have to obtain an updated permit. He sued the cab company for a number of wage and hour violations, some under California Wage Order No. 9, some under the Labor Code, some under the Unfair Competition Law, and one for wrongful termination in violation of public policy. The trial court granted summary judgment for the cab company, based on the Borello standard, in  a decision handed down before the Supreme Court issued its Dynamex decision on 4/30/2018.

In Borello, the Supreme Court had explained that the principal test for determining whether an employment relationship existed was whether the recipient of the worker's services "has the right to control the manner and means of accomplishing the result desired." It also identified the following "secondary indicia" of an employment relationship: "(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee."

In Dynamex, the Supreme Court ruled that a more expansive definition was more appropriate for wage claims brought under one of the wage orders. It adopted the "ABC test," used in many other jurisdictions to decide whether an employment relationship existed. That test presumes that a worker is an employee, unless the person who engaged the worker's services establishes all of the following: "(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; (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 the hiring entity."

The Court of Appeal ruled that the ABC test should not be applied outside the wage order context. That is where the language on which the Supreme Court relied in adopting the test appears. Further, the wage orders warrant a broader definition, because they were intended to regulate very basic working conditions that should be extended to the widest class of workers. Application of the ABC test to the facts before the Court compelled reversal of summary adjudication of the wage orders claims. Although Borello applied to the other claims, the Court of Appeal did not decide whether there was a triable issue under that standard, because Garcia's brief did not adequately raise the issue.

The ABC's of Employment

The California Supreme Court has handed down an important decision that explains how to distinguish between an employee and an independent contractor, for purposes of enforcing California's wage orders. In Dynamex Operations West, Inc. v. Superior Court, Case No. S222732 (Apr. 30, 2018), the Court adopted the "ABC" test. That test assumes an individual who does work for another person is an employee of that person, unless the person proves (A) that the worker is free from the other person's control and direction in connection with the performance of the work, and (B) that the worker is performing work that is outside the usual course of the other person'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.

The California wage orders adopted by the Industrial Welfare Commission are quasi-legislative regulations that have the force of law. Among other things, they establish the overtime rules, and define the exemptions from those overtime rules. All but one of the 17 contains the following definitions: "employ" means "to engage, suffer, or permit to work;" "employee" means "any person employed by an employer;" and "employer" means "any person as defined in Section 18 of the Labor Code, who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person." All the wage orders may be accessed from this page on the website of the Department of Industrial Relations.

The Dynamex opinion discusses three earlier Supreme Court opinions that dealt with the distinction between employees and independent contractors.

1. S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 241. The narrow ruling in this case was that farmworkers hired by a grower to harvest cucumbers under a "sharefarmer" agreement were employees for purposes of the Workers' Compensation Act. Many decisions since Borello have cited that case as applying the common law test for employee. The decision identified a number of factors to be considered in making that determination. Those have come to be known as the "Borello factors," and have routinely been applied in a number of contexts, including wage and hour litigation, to determine whether or not an individual is an employee. For a recent example, see Linton v. DeSoto Cab Co., Inc. (2017) 15 Cal.App.5th 1208. The Dynamex decision says that Borello should be understood as adopting a "statutory purpose standard," rather than a universally applicable multi-factor test.
2. Martinez v. Combs (2010) 49 Cal.4th 35. Seasonal agricultural workers sued a strawberry grower and produce merchants who bought strawberries from the grower for failure to pay minimum wage and overtime. The Supreme Court stated that the wage orders contain three alternative definitions of employment: (1) to exercise control over the wages, hours or working conditions, (2) to suffer or permit to work, or (3) to engage, thereby creating a common law employment relationship. The produce merchants could not be considered employers under any of the definitions.
3. Ayala v. Antelope Valley Newspapers, Inc. (2014) 59 Cal.4th 522. Newspaper carriers claimed that a newspaper company had misclassified them as independent contractors. Because both sides had agree that the Borello test was the applicable standard, the Supreme Court did not consider the scope of the definition of employment in the wage orders.

Insurance Agent Is An Independent Contractor, Not An Employee

The enactment by the California legislature of new penalties for willful misclassification of independent contractors should have employers paying close attention to the applicable standards. (See Labor Code section 226.8.) A recent decision from the First District Court of Appeal in San Francisco is instructive. Arnold v. Mutual of Omaha Ins. Co., Case No. A131440 (Dec. 30, 2011).

Kimbly Arnold was licensed by the Department of Insurance as an independent agent or broker. When she was appointed by Mutual of Omaha as a nonexclusive agent, she was under appointment with another insurance company to offer its products. Her contract with Mutual of Omaha stated that she was an independent contractor, and made her responsible for maintaining any required license. The evidence submitted in support of Mutual's summary judgment motion showed that she had no supervision, did not receive a performance evaluation. Training was available, but attendance was not required. Mutual's insurance agents were responsible for their own expenses, including business cards, vehicles and office equipment. If they elected to use Mutual's office, they had to pay monthly fees to cover the expenses.

Arnold brought a class action on behalf of all Mutual's licensed agent's, claiming that they were employees and should have been reimbursed for expenses under Labor Code section 2802, and were not paid the wages they were owed timely upon termination of employment, as required by Labor Code section 201 and 202. The Court of Appeal affirmed the grant of summary judgment for Mutual, because Arnold was not an employee entitled to the protections of those sections.

The Court of Appeal rejected Arnold's argument that she met the "definition" of employee in Labor Code section 2750, which provides "The contract of employment is a contract by which one, who is called the employer, engages another, who is called the employee, to do something for the benefit of the employer or a third person." Section 2750 is not a definition of "employee," but a definition of "contract of employment."

Because it found no statutory definition, the court turned to the common law principles articulated by the California Supreme Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989). That decision identified the "principal" factor of the test to be whether the person receiving the services has the right to control the manner and means of accomplishing the result. It identified the following additional factors: whether the principal has the right to discharge at will, without cause; whether the one
performing services is engaged in a distinct occupation or business; the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; the skill required in the particular occupation; whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; the length of time for which
the services are to be performed; the method of payment, whether by the time or by the job; whether or not the work is a part of the regular business of the principal; and, whether or not the parties believe they are creating the relationship of employer-employee.

In this case, all the factors pointed to an independent contractor arrangement.

For a post about another case in which the employer did not fare so well, see $14.4 Million To FedEx Drivers Misclassified As Independent Contractors.