California Court Complicates Determination of Independent Contractor Misclassification Claims
A decision earlier this month by a California Court of Appeal in Dynamex v. Superior Court greatly (and unnecessarily) complicates the determination of whether an employee is an independent contractor or an employee, and in some instances makes it extremely difficult for an employer to defeat class certification of an independent contractor misclassification claim.
The plaintiff in the case was a delivery driver for Dynamex, a nationwide courier and delivery service. Dynamex used to classify its drivers as employees, but in 2004 Dynamex converted its drivers to independent contractor status. One driver thanked Dynamex with a lawsuit alleging that the reclassification to independent contractor status violated California law. The plaintiff, who sought to represent a class of about 1,800 Dynamex drivers, alleged that due to their improper independent contractor classification, they were unlawfully denied overtime compensation and expense reimbursement. The trial court ultimately certified a class. Dynamex later sought to have the class decertified, arguing that the trial court applied the wrong legal standard for determining whether common issues predominated on liability. The trial court applied the definitions of “employ” and “employer” found in the applicable IWC wage order (Wage Order No. 9, applicable to the transportation industry). That wage order defines “employ” as “to engage, suffer, or permit to work,” and defines “employer” as any person “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.” Applying these definitions, the trial court concluded that determining whether the drivers were “employees” (as opposed to independent contractors) within the meaning of the wage order could be determined based on common proof and would not require numerous individualized inquiries. As such, the trial court concluded that class certification was proper.
Dynamex sought to have the court of appeal decertify the class, arguing that the trial court applied the wrong test for determining whether a worker is an employee or an independent contractor. Dynamex argued that the multi-factor test set forth by the California Supreme Court in S.G. Borello & Sons v. Dep’t of Indus. Relations, 48 Cal.3d 341 (1989), applied and that under this test, liability could not be established based on common proof, but instead would require individualized inquiries concerning the degree of control Dynamex exercised over any individual driver, along with other individualized inquiries relevant to the Borello factors.
The court of appeal agreed with Dynamex – well, sort of. With highly questionable reasoning, the court essentially held that the test for independent contractor vs. employee status varies, depending on what wage and hour violation is being alleged. Thus, if a worker is alleging that the employer violated a provision of an applicable wage order, then the wage order definitions of “employer” and “employ” apply to determine whether the worker is an employee. However, if the worker is alleging wage and hour violations that are not based on violation of a wage order but rather on some other provision of law (e.g. a Labor Code requirement that is not also set forth in the wage order), then Borello’s multi-factor common law test for employee/independent contractor status applies. Thus, the court looked at the claims alleged by the drivers against Dynamex and held that to the extent the claims were based on violations of the wage order (e.g. the overtime claim), the trial court had properly applied the definitions of “employ” and “employer” set forth in the wage order to grant class certification. However, the court held that to the extent the drivers’ other claims did not fall under the wage order, the trial court would need to reconsider whether class certification was appropriate based on application of the Borello test. More specifically, the court explained that the wage order expressly covers expense reimbursement of certain types of expenses (e.g. tools, uniforms), but may not cover all of the types of expenses for which the driver class was seeking reimbursement (e.g. rental or purchase of personal vehicles). On remand, the trial court will have to consider which of the expense claims are for expenses covered by the wage order and which are not, and for claims that fall outside the wage order the trial court will have to re-assess the propriety of class certification using the multi-factor Borello test.
The Dynamex decision is a bad one for employers defending class claims for independent contractor misclassification for two important reasons. First, as a practical matter, application of the wage order definitions of “employ” and “employer” makes it virtually impossible for an employer to prevail in establishing that a worker is an independent contractor because all workers are “engaged” and “permitted to work” which makes the hiring entity an “employer” under the wage order, as interpreted by the Dynamex court. Second, the Dynamex decision makes it much easier for a class to be certified in an independent contractor misclassification case because the wage order definitions of “employ” and “employer” are much more susceptible to common proof than the Borello factors. For these reasons, the decision magnifies the risk of classifying workers as independent contractors in California. In this author’s opinion, the Dynamex decision is questionable because it relies predominantly on caselaw applying the wage order definitions to determine whether an third party could be held liable for wage and hour violations as a “joint employer.” Joint employer analysis has nothing to do with independent contractor classification analysis. It seems likely that this issue will end up before the California Supreme Court. In the meantime, however, California employers should tread cautiously and carefully in classifying workers as independent contractors because the court decision trend in this area has been largely unfavorable for employers—with several recently publicized cases finding employers liable for misclassification of workers as independent contractors and now the Dynamex court holding that an “employee” includes any worker “engaged” or “suffered or permitted” to work.