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.

Are Ride Share Services Employers?

Recent news reports about class action lawsuits against Uber and Lyft provide an opportunity for revisiting the standards that courts and enforcement agencies use to determine whether an employment relationship exists between the provider of labor and the recipient of the benefits of the labor. Uber is the subject of a lawsuit entitled O'Conner v. Uber Technologies, Inc., currently pending in the United States District Court for the Northern District of California, where it is being heard by Judge Vince Chhabria, under Case No. 13-CV-03826-EMC. The Lyft case is in the same district, where it is being heard by Judge Edward Chen -- Cotter v. Lyft, Inc., under Case No. 13-CV-04065-VC.

In both cases, the judges denied summary judgment motions by the defendants, on the grounds that there were triable issues as to whether the companies were employers of their drivers, The question to be decided at trial in each case is whether the drivers are independent contractors or employees entitled to the protections of the wage and hour laws. The answer turns on the amount of control that each company exercises over the manner and means by which the drivers provide services.

Under the venerable case of S.G. Borello & Sons, Inc. v. Dep’t of Indus., 48 Cal. 3d 341 (1989), California law (which applies in both cases) presumes that anyone who provides services to another is an employee. The burden is on the presumptive employer to show otherwise by analyzing the following factors: (1) the right to control the work, (2) the alleged employee's opportunity for profit or loss depending on his managerial skill, (3) the alleged employee's investment in equipment or materials required for his task, or his employment of helpers, (4) whether the service rendered requires a special skill, (5) the degree of permanence of the working relationship, and (6) whether the service rendered is an integral part of the alleged employer's business. For a practical, question and answer approach to applying the California standard, see the Employment Development Department's Employment Determination Guide.

The federal standard under the Fair Labor Standards Act is similar. For example, in Bonnette v. California Health & Welfare Agency, 704 F.2d 1465, 1470 (9th Cir. 1983), the Ninth Circuit stated that the determination must be based on the economic realities of the situation, including whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.

Cases involving taxi drivers may provide some guidance as to how the Uber and Lyft cases will ultimately turn out. In Yellow Cab Cooperative v. Workers' Compensation Appeals Bd., 226 Cal.App,3d 1288 (1991), the California Court of Appeal ruled that a cab driver was an employee of Yellow Cab for purposes of workers compensation. Although the driver provided services under a written lease with Yellow Cab and was responsible for his own expenses, Yellow Cab exercised substantial control over the manner and means by which the driver provided the services. It marketed the service and had dispatchers who directed the drivers to calls. It instructed drivers on matters of behavior toward the public, personal appearance, and keeping their cabs clean. The company could require drivers to return to the yard. It barred them from working for other companies.

By contrast, in Yellow Taxi Co. v. NLRB, 721 F.2d 366 (D.C. Cir. 1983), a federal court of appeals ruled that taxis drivers were not employees under the National Labor Relations Act. There the company's written lease provided that the driver paid a fixed rental, regardless of his or her earnings on a particular day, and retained all the fares collected without having to account to the company in any way. That created a "strong inference" that the company did not control the manner and means of providing services.

Note that the Fair Labor Standards Act exempts drivers for "an employer engaged in the business of operating taxicabs" from the overtime rules (although not from the minimum wage requirement). See 29 U.S.C. section 213(b)(17).

For news reports on the denial of summary judgment motions in the Uber and Lyft lawsuits, see Juries To Decide Landmark Cases Against Uber and Lyft in Forbes, Judges back drivers in lawsuits against Uber, others in The Boston Globe, Judges Rule Lawsuits Over Lyft, Uber Drivers Should Proceed in The Wall Street Journal, and Uber and Lyft drivers' class-action lawsuits will go to jury trials in The Los Angeles Times.

Are truckers independent contractors?

Trucking companies have become the targets of lawsuits alleging that they misclassified their drivers as independent contractors. Such cases include Robles v. Comtrak Logistics, Inc., Case No. 2:13-CV-00161 (putative class action currently pending in the federal court in Sacramento) and Seacon Logix Inc. v. Labor Commissioner (Seacon ordered to pay $105,000 for violations against four of its drivers).

Truck drivers often own or lease their own trucks, and sign independent contractor agreements with the trucking companies. Those two factors alone are not sufficient evidence of independence to make the drivers independent contractors. As the California Court of Appeal explained in a 2007 case involving FedEx drivers: "The parties' label is not dispositive and will be ignored if their actual conduct establishes a different relationship." Estrada v. FedEx Ground Package System, 64 Cal. Rptr. 3d 327 (Ct.App. 2007). FedEx wound up paying $27 million for that misclassification case.

The factors to be evaluated in determining whether a driver is an independent contractor are: (1) whether the worker is engaged in a distinct occupation or business, (2) whether, considering the kind of occupation and locality, the work is usually done under the principal's direction or by a specialist without supervision, (3) the skill required, (4) whether the principal or worker supplies the instrumentalities, tools, and place of work, (5) the length of time for which the services are to be performed, (6) the method of payment, whether by time or by job, (7) whether the work is part of the principal's regular business, and (8) whether the parties believe they are creating an employer-employee relationship.

Under a California statute that became effective in January 2012, companies that "willfully" misclassify employees as independent contractors face increased penalties of up to $15,000 per violation (increased to $25,000 if there was a "pattern or practice" of misclassification. See California Labor Code sections 226.8 and 2753.

Before classifying workers as independent contractors businesses should make sure that they have carefully analyzed the nature of their relationships with those workers so that they do not incur the substantial liability that would be imposed if the workers have been misclassified.

Who Is The (An) Employer?

Questions may arise about which of multiple actors is responsible for various aspects of an employment relationship. When a temporary agency provide a worker to one of its clients, can the client be sued for not providing a meal period? Is the agency or the client responsible for compliance with the family leave statutes? If an outside contractor supplies employees to provide document services at its client's work site, who is liable for any workplace harassment claims? Can a payroll service be held liable to its client's employees for failure to pay wages in accordance with the California Labor Code? The last was the subject of the Court of Appeal's recent decision in Aleksick v. 7-Eleven, Inc., Case No. D059236 (May 8, 2012). It provides a good jumping off point for a discussion of the legal principles that determine who a particular worker's employer is.

Kimberly Aleksick worked for a 7-Eleven franchise owned by Michael Tucker. His franchise agreement with 7-Eleven to use a payroll service operated by 7-Eleven. Aleksick brought a class action against 7-Eleven claiming that its practice of converting minutes to hundredths of an hour sometimes shorted employees a few seconds worth of pay. The dispositive question was whether 7-Eleven could be considered Aleksick's employer by operation of the payroll service.

Common Law

Determining whether a worker is an employee is an issue in many areas of law. At common law, the issue arises with respect to responsibility for the worker's torts. If an organization hires an independent contractor to carry out a task, and the independent contractor is negligent, the organization is not liable. Foster v. County of San Luis Obispo, 14 Cal. App. 4th 668, 17 Cal. Rptr.2d 730 (1993) (county not liable for legal malpractice of independent lawyer retained to represent indigent defendant). But, the organization is liable under the doctrine of respondeat superior for negligence of its employees. Barner v. Leeds, 24 Cal. 4th 676, 13 P.3d 704, 102 Cal. Rptr. 2d 97 (2000) (county is liable for malpractice of deputy public defender whom it employs).

The common law standard looks to the degree of control that the putative employer has over the manner and means by which the worker carries out his or her task. The California Employment Development Department published the Employment Determination Guide, which explains the standard in question and answer format, and provides concrete examples.

Wage and Hour

Federal and state law impose minimum wage, overtime and other wage and hour requirements on employers. Those who meet the common law definition of employer must comply with those regulations. However, the laws contain their own definitions that may be more encompassing.

The California wage orders refer to the common law standard but defines employ to include  "to exercise control over the wages, hours or working conditions" or "to suffer or permit to work." (The California wage orders are available from the Industrial Welfare Commission website.) The suffer or permit to work language is derived from child labor legislation designed to prevent companies that controlled a work site from disclaiming responsibility for minors who might be working there although not under the direct control of the company. The exercising control standard allows the law to reach through straw men and sham arrangements to get at the true employer, and to apply to situations where multiple entities control different aspects of the employment relationship. The California Supreme Court explained the standards in Martinez v. Combs, 49 Cal.4th 35, 109 Cal. Rptr. 3d 514, 231 P.3d 259 (2010).

In the Aleksick case referred to at the outset the Court of Appeal determined that the payroll service did not meet any of the definitions of employer under California law.

Although the federal Fair Labor Standards Act definition of employ includes suffer or permit to work, the United States Supreme Court has adopted an economic reality test that does not necessarily match the more all-encompassing definition under California law. Tony and Susan Alamo Foundation v. Secretary of Labor, 471 U.S. 290 (1985).

Workers Compensation

California's Workers Compensation Act covers persons in the service of an employer under any contract of hire, but not independent contractors. The Act defines an independent contractors as "any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished. Because of the remedial purposes of the Act, the coverage may sometimes extend beyond those who would be considered employees under the common law test. S.G. Borello & Sons v. DIR, 48 Cal.3d 341, 769 P.2d 399, 256 Cal. Rptr. 543 (1989) ("sharefarmers" engaged to harvest cucumbers were employees of the grower).

Anti-Discrimination Laws

Federal and state laws prohibit employers from harassing, and discriminating and retaliating against their employees based on protected characteristics. Where more than one entity has control over conditions in the workplace, liability may extend beyond the one considered the employer under common law principles. The EEOC has published an Enforcement Guidance on the application of equal employment opportunity laws to contingent workers placed by staffing firms. The following example from the guidance illustrates how the laws apply to one such situation:

Example 9: A temporary employment agency receives a job order for a temporary receptionist. The client requires that the individual assigned to it speak English fluently because a large part of the job entails communication with English-speaking persons who call the client or who come to the client's work place. The agency assigns an Asian American individual who speaks English fluently, but with an accent. The client insists that the agency replace her with someone who can speak unaccented English. The agency complies with that request and sends an individual who speaks English fluently with no accent. The Asian American individual files a charge with the EEOC. The investigator determines that English fluency was necessary for the job. However, he further determines that CP's accent does not interfere with her ability to communicate and that she has effectively performed similar jobs. The investigator properly concludes that both the client and the staffing firm are liable for terminating CP on the basis of her national origin.

FMLA

The federal Family and Medical Leave Act and the California Family Rights Act require employers with 50 or more employees to provide unpaid leave benefits. As with the anti-discrimination laws, questions may arise about which entity is responsible for the benefits and providing a job when the employee is ready to return to work. The Department of Labor has explained the principles in section 825.106 of its regulations.

The need to determine whether an employment relationship exists arises in many other contexts. While some of those may have unique standards, the general standards discussed here are a useful starting point for all such determinations.

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.

New California Employment Laws

California State Capitol

It has been a busy few weeks on the legislative front in California. After a closing flurry of activity from the legislature, Governor Brown this week finished signing and vetoing the various bills that made their way to his desk. Here are some new laws that will impact employers, beginning January 1, 2012:

SB 299: This bill prohibits an employer from refusing to maintain and pay for coverage under a group health plan for an employee who takes up to four months of leave because of pregnancy disability. This applies to all employers with five or more employees.

AB 22: This bill prohibits an employer or prospective employer, with the exception of certain financial institutions, from obtaining a consumer credit report, as defined, for employment purposes unless the position of the person for whom the report is sought is (1) a position in the state Department of Justice, (2) a managerial position, as defined, (3) that of a sworn peace officer or other law enforcement position, (4) a position for which the information contained in the report is required by law to be disclosed or obtained, (5) a position that involves regular access to specified personal information for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, (6) a position in which the person is or would be a named signatory on the employer’s bank or credit card account, or authorized to transfer money or enter into financial contracts on the employer’s behalf, (7) a position that involves access to confidential or proprietary information, as specified, or (8) a position that involves regular access to $10,000 or more of cash, as specified.

AB 592: This bill would makes it an unlawful employment practice for an employer to interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right to leave under the California Family Rights Act or for pregnancy disability. The statute states that it is declaratory of existing law.

SB 459: This bill adds section 226.8 to the Labor Code. The new section makes it unlawful (1) to willfully misclassify an individual as an independent contractor, and (2) to charge misclassified independent contractors fees or make deductions from their compensation for items such as goods, materials, maintenance, licenses, or repairs. An employer who willfully misclassifies an independent contractor may be subject to a penalty of $5,000 to $15,000 for each violation, and, if the employer is found to have engaged in a "pattern and practice" of misclassifying employees as independent contractors, $10,000 to $25,000 for each violation.

AB 1396: This bill requires any employer who enters into a contract of employment involving commissions as a method of payment with an employee for services to be rendered within the state to put the contract in writing and to set forth the method by which the commissions are required to be computed and paid. The enactment was prompted by a federal court decision that invalidated Labor Code section 2751 because it only applied to out-of-state companies. Lett v. Paymentech, Inc., 81 F.Supp.2d 992  (N.D. Cal. 1999).

SB 272: Existing law requires an employer to grant a leave of absence to an employee who is an organ donor or a bone marrow donor. The leave of absence to an organ donor is up to 30 days in a one-year period. The leave of absence for a bone marrow donor is up to 5 days in a one-year period. The leave of absence for either donor is not a break in his or her continuous service for the purpose of his or her right to salary adjustments, sick leave, vacation, annual leave, or seniority. As a condition of an employee’s initial receipt of the leave of absence, an employer may require the employee to take a specified number of days of earned but unused sick or vacation leave, unless that would violate provisions of an applicable collective bargaining agreement. This bill would provide that the days of leave are business days rather than calendar days, and that the one-year period is measured from the date the employee’s leave begins and consists of 12 consecutive months. This bill would also provide that the leave of absence is not a break in the employee’s continuous service for the purpose of his or her right to paid time off. This bill would further provide that the employer may condition the initial receipt of leave upon the employee’s use of a specified number of earned but unused days for paid time off.

$14.4 Million To FedEx Drivers Misclassified As Independent Contractors

This past week a referee appointed by the Los Angeles Superior Court recommended that the court award FedEx drivers in California $14.4 million for unreimbursed job-related expenses and accrued interest. This is the latest in a long-running nationwide battle between FedEx and its drivers over how they should be classified for employment law purposes. Other employers should learn from FedEx's experience. For information on this and other cases against FedEx, visit FedEx Drivers Lawsuit.

Last year, the California Court of Appeal had affirmed the trial court ruling that the drivers were employees, and not independent contractors. It explained that the test for determining employee status is "whether the principal has the right to control the manner and means by which the worker accomplishes the work." Even though FedEx's written agreements with its drivers stated that they were independent contractors, "FedEx’s control over every exquisite detail of the drivers’ performance, including the color of their socks and the style of their hair, supports the trial court’s conclusion that the drivers are employees, not independent contractors." The full text of the decision is available here.

Some employers think it is as simple as choosing between IRS Form 1099 reporting, and IRS Form W-2 Reporting. As the IRS explains in its "Independent Contractor or Employee ..." publication, the nature of the relationship, not the form, determines whether or not a person is an employee. Making the wrong choice can lead to serious consequences, such as liability for unreimbursed expenses as in the FedEx case, for overtime obligations, for employee benefits, for workers compensation premiums and penalties, and unpaid taxes.

What should an employer do to avoid difficulties like those encountered by FedEx? Begin with the assumption that any worker who is a regular part of your business is an employee. If you are convinced that the worker may have sufficient independence to qualify as an independent contractor, then conduct a thorough analysis. To assist you in that analysis, the California Employment Development Department publishes the Employment Determination Guide, which contains a thorough explanation of the subject, and a series of yes or no questions that explore the determinative factors.

If you determine after your analysis that the worker is indeed an independent contractor, document the relationship in a written contract. You can find some sample contracts through the Employment Forms page at FindLaw.