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California Supreme Court ruling could force companies to reclassify contractors as employees

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On Monday the California Supreme Court issued a ruling that makes it more difficult for companies to label workers as independent contractors rather than employees. The Court embraced a standard presuming that all workers are employees instead of contractors, and placed the burden on any entity classifying an individual as an independent contractor establishing that such classification is proper under the newly adopted “ABC test.”

The Court framed its decision by broadly characterizing the misclassification of independent contractors as harmful and unfair to workers, honest competitors, and the public as a whole. The Court, however, conceded that the “suffer or permit to work” standard is a “term of art” that cannot be interpreted literally because it would obviously encompass workers who are traditional independent contractors, and would more or less eviscerate the commonly understood distinction between employees and independent contractors. Consequently, the Court limited the scope of “suffer or permit to work” by adopting the “ABC test.”

Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the putative employer proves:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the 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.

Each of these requirements needs to be met in order for the presumption that a worker is an employee to be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor.

The Court dismissed as irrelevant the undeniable fact that many drivers prefer to operate independently. First, according to the Court, the state’s interest in securing wage and hour benefits afforded to employees outweighed any personal choice. And second, if workers were permitted to operate independently, other workers would be displaced because businesses would prefer to retain the services of independent contractors.

Scopelitis Transportation Law points out that the legion of cases across the U.S. finding drivers to be independent contractors, coupled with the fact that independent contractor truck drivers are truly independent as evidenced by their own trade associations, including OOIDA, suggests there should be space for independent contractor drivers, even in California. Also, an interpretation of the B-prong as comprehensively prohibiting truck drivers from providing services to motor carriers as independent contractors would seem to be the kind of direct economic regulation prohibited by the Federal Aviation Administration Authorization Act (FAAAA). The First Circuit Court of Appeals struck down Massachusetts’ statutory ABC test under the FAAAA for this reason.

Further, the decision would seem to raise as many questions as it answers. It would be premature to issue definitive forecasts about its impact, as some are already doing, suggesting the decision could dramatically increase the costs for startups reliant on the gig economy, such as Uber, Lyft and other startups reliant on independent contractors. Scopelitis’ Greg Feary and the Owner-Operator Practice Section, along with Jim Hanson and the Class Action Practice Section, and their respective teams, including several of the firm’s California-licensed attorneys, are developing guidance to address the decision both on an operational level and in connection with ongoing cases.

Timothy Kim of SheppardMullin observes that it is also not yet clear whether the ABC test applies to wage claims that do not arise from a wage order. For example, a claim for reimbursement for business expenses such as fuel and tolls that are not governed by a wage order and are obtainable only under section 2802 of the Labor Code may still be controlled by a previous measure. Also left open by the Supreme Court’s decision is whether the “exercises control over the wages, hours or working conditions” prong of the wage orders’ definition of “employ” is applicable to classification questions outside the joint employment context.

On the operational side, the Court’s decision may support more robust adoption of the settlement carrier model as a way of further highlighting the independence of owner-operator drivers. A legislative response is also an option to be considered.

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