WASHINGTON EMPLOYERS BEWARE: WORKERS IN SAME LINE OF BUSINESS ARE EMPLOYEES, SAYS CALIFORNIA SUPREME COURT

Date: May 16th, 2018
Categories: Employment

The California Supreme Court’s April 2018 opinion in Dynamex Operations West, Inc. v. Superior Court (“Dynamex”) essentially reclassified thousands of California independent contractors as employees, requiring that each factor of a three factor test be met before a worker is considered an independent contractor.

This ruling represents a tectonic legal shift which should concern Washington employers (and employers nationwide). Employers that are found to have misclassified workers are subject to significant penalties, such as prior taxes and fees owed and heightened payment requirements against the employer in the future. The Dynamex ruling will almost assuredly impact employers in states such as Washington, Idaho, Nevada and Oregon, as this ruling signals the not-too-distant future of draconian employment classification laws in the western United States.

DYNAMEX: THE “ABC TEST”

Dynamex is a nationwide courier and delivery service that offers on-demand, same-day pickup and delivery services. Before 2004, Dynamex classified its California delivery drivers as employees. Starting in 2004, Dynamex converted all of its drivers to independent contractors in order to save on employment costs.

In January of 2005, Plaintiff Lee entered into a written independent contractor agreement with Dynamex to provide delivery services for the company. After terminating his employment with Dynamex, Lee filed a lawsuit on his own behalf and on behalf of similarly situated Dynamex drivers, alleging that Dynamex’s misclassification of its drivers as independent contractors led to Dynamex’s violation of the provisions of the applicable state wage order governing the transportation industry. As a result, the plaintiffs argued that Dynamex had engaged in unfair and unlawful business practices.

Lee and other drivers attempted to certify as a class for a class action lawsuit. Dynamex attempted to deny this class certification for multiple reasons, Dynamex’s main argument being that Lee and the other drivers were independent contractors and not employees under California’s wage order laws. Thus, the Court focused chiefly on the issue of the proper worker classification test applicable in California.

The Dynamex Court first analyzed California’s previous employment classification rulings under both Martinez v. Combs, and Borello. In short, California’s previous worker classification tests under these seminal cases relied on whether the employer had the right to control the actions of the individual worker in performing services on behalf of the employer. This is similar to the worker classification tests currently applied in each of Idaho, Nevada and Oregon.

The Dynamex Court found each of the Martinez and Borello multi-factor standards too broad, noting that both standards: (1) make it difficult for businesses and workers to determine in advance how the worker will be classified; and (2) these standards afford a hiring business the ability to divide its workforce into disparate categories and evade fundamental responsibilities under wage and hour laws.

Instead, the Court determined that a “simpler, more structured test for distinguishing between employees and independent contractors” should be used. This test, the so-called “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 satisfies each of three conditions. The worker must:

“(a) be 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) perform work that is outside the usual course of the hiring entity’s business; and
(c) be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

The impact of this ABC Test cannot be understated: each of the required factors of the ABC Test must 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.

This test essentially makes it far harder (i.e. improbable) for employers to argue that individuals performing services customary of the employer (e.g., an electrician subcontracting work to another electric company; an attorney on contract at a law firm; or an independent developer at an app start-up) are not employees.

The Dynamex Court relied on a few (seemingly outdated) examples when discussing the applicability of the ABC Test, as set forth in the chart, below, to carry its point:

Least Likely to be an Employee More Likely to be an Employee Most Likely to be an Employee
A retail store hires an outside plumber to repair a leak in a bathroom on its premises, the services of the plumber 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 plumber to provide services to it as an employee. 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. When a bakery hires cake decorators to work on a regular basis at its normal business operation on its custom-designed cakes.

 

Based on the Court’s application of the ABC Test to the Dynamex case, the Court found that Lee and the other drivers performed the exact same services offered by Dynamex, thus classifying the drivers as employees and not independent contractors, and allowed the class action to move forward. It did not matter that the respective contracts between each worker and Dynamex stated that the workers were independent contractors, or that the workers controlled when and how the services were performed. All that mattered to the Dynamex Court was that the workers operated in Dynamex’s usual course of business, failing Part B of the ABC Test, and thus failing the ABC Test in total.

ANFINSON V. FEDEX GROUND PACKAGE SYSTEM, INC.: THE “ECONOMIC REALITIES TEST”

Under the seminal Washington employment classification case, Anfinson v. FedEx Ground Package System, Inc. (“Anfinson”), the Washington Supreme Court found that the “economic realities” of the employer-worker relationship were the key in determining worker classification.

With facts extremely similar to the Dynamex case, the plaintiffs in the Anfinson case (also a class action made up of delivery drivers, but for FedEx), sued under Washington’s Minimum Wage Act, arguing that they should be classified as FedEx’s employees, and not as independent contractors.

Under previous Washington case law, the “right to control” test was used to classify workers, and relied on the degree of the employer’s right to control the manner in which the work was performed. FedEx relied on this test in determining that its drivers were independent contractors and not employees, arguing that “the drivers could not be employees because the drivers had a large amount of control over their respective schedules and the manner of performance of their work.”

Unpersuaded by this argument, the Washington Supreme Court determined that “legislative history decisively favors Anfinson’s proposed interpretation” and found that “the correct inquiry is whether, as a matter of economic reality, the worker is economically dependent upon the alleged employer or is instead in business for himself” in addition to several other, less meaningful factors. By utilizing this “Economic Realities Test”, the Court affirmed the ruling of the Washington Court of Appeals finding for the plaintiff-drivers.

Applying the examples of the Dynamex opinion set forth, above, a Washington court’s current application of the Anfinson Economic Realities Test would likely lead to the following employment classifications:

Far More Likely an Independent Contractor More Likely to be Independent Contractor More Likely to be Employee
A retail store hires an outside plumber to repair a leak in a bathroom on its premises. The plumber performs these services for several different clients each day. 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. The seamstress works for others and has her own business, relying on income from multiple sources. When a bakery hires cake decorators to work on a regular basis at its normal business operation on its custom-designed cakes. The cake decorators, while having their own registered Washington business, solely perform cake decoration for the bakery, with no other sources of income.

AFTER DYNAMEX: AN UNCHARTED LANDSCAPE

So, with such a direct contrast between the ABC Test of the Dynamex court, and the Economic Realities Test of the Anfinson court, what does this mean for Washington employers (and employers nationwide) moving forward?

If Washington law moved in California’s direction and chose to adopt the ABC Test, it would be far more likely that many Washington employers would find themselves in a battle with Washington’s Department of Labor and Industries over employee misclassification. This reality is not far off – many parties in the Washington legislature are actively working towards (and would welcome) an employment classification scheme similar to California. For example, see House Bill 1300 (currently in committee).

For smaller start-ups, the application of the ABC Test could be catastrophic – start-ups generally rely on using outside, independent contractors to get their businesses up and running. If start-ups (including tech companies and lifestyle businesses that rely on workers hired as contractors as a fundamental part of their business) are required to classify contractors as employees for fear of failing the ABC Test, then start-ups may refrain from enlisting the services of competent, independent workers, and may find the experience of attempting to start a business and utilizing a workforce cost prohibitive altogether.

Many employers in the construction industry would also feel the sting, too. Let’s say an electrical contractor has too much work, and needs to subcontract some work to another electrical business. Applying the ABC Test, this would be problematic and likely prohibitive – the electrical subcontractor is in the same line of business as the electrical contractor. Because each factor of the ABC Test must be met for a worker to be classified as an independent contractor, under the ABC Test, the electrical subcontractor would likely be considered an employee of the electrical contractor, leading to a potential major classification problem neither party intended.

Additionally, for larger businesses based in Seattle (like Amazon) who have multiple lines of business (from groceries, to artificial intelligence, to health care), a use of the ABC Test would almost assuredly lead to a finding that many workers in those sectors, classified as independent contractors, would more likely than not be considered “inside” the employers’ respective business in those same areas, and thus lead to classification as an employee.

CONCLUSION

Only time will tell if the Dynamex Court’s actions can be remedied or reversed in some way. Bottom line, the Dynamex decision is almost a complete departure from previous worker classification tests utilized by California, and tests currently utilized in Washington, Idaho, Oregon and Nevada. By formulating the ABC Test, the California Supreme Court has certainly caused a rift between California employment law and employment law in the states listed herein. We will continuously monitor this area of law for Washington’s analogous ruling to Dynamex, if it ever occurs, and promptly report our findings to our friends and clients.

For those with questions or concerns regarding these matters, we’re here to help. The Ashbaugh Beal Corporate/Securities Law Group is following developments in these important regulatory areas closely, and will continue to do so. Any new developments may have a significant and lasting impact for our clients and their compliance obligations. This blog will cover important developments and considerations involving these laws, focusing on the practical opportunities and pitfalls they present.

If you have any questions about employment laws affecting your business, please do not hesitate to contact Joe Campos, Matt Runkel, Aaron Thomson, or Chris Ferrell all at 206-386-5900.