In a major decision with wide-ranging implications, the California Supreme Court handed down a decision on April 30, 2018, substantially restricting the ability of California businesses to lawfully use independent contractors in their core business operations. Dynamex Operations, Inc. v. Superior Court (Lee), Case No. S22732.
Under pressure from government tax and employment law enforcement agencies, as well as labor representatives, the Court announced a new independent contractor test. The decision is widely viewed as a potential blow to the gig economy, and a significant restriction on employer flexibility in determining the most cost-effective configurations between contractors and employees.
Facts and Analysis
Dynamex is a nationwide package and documents delivery service. In recent years it classified its drivers and delivery personnel as independent contractors. The Supreme Court, citing arguments that such classification denied workers various employment benefits and resulted in significant loss of tax revenue, held these contractors were improperly classified, and must be treated as employees. The determination of class-wide damages awaits.
Under prior law, the test for determining contractor status relied upon a number of factors, and thus allowed employers some flexibility in classifying certain workers as contractors, especially if they could demonstrate that one, but not all, of the definitions were met. No more. Now to establish an exemption the employer must prove that all factors point to independent contractor status under a new test. Here’s how it works:
First, the courts will presume that anyone whom the employer “suffers or permits” to work for them is presumed to be an employee. This definition presumes that “all workers who would ordinarily be viewed as working in the hiring business” are employees. (Emphasis is the Court’s.) The only examples of exclusions given by the Court would be workers – like plumbers or electricians – who the Court called “genuine independent contractors” – who do not perform services that are part of the employer’s scope of operations or line(s) of business.
Second, the Court adopted what in other states has been called the “ABC” test. Under this test, a worker is properly considered an independent contractor only if the employer establishes all of the following:
A. The worker is free from control and direction of the hirer in connection with the performance of the work, both under the contract and in fact; and
B. The worker performs tasks that are outside the usual course of the hiring party’s business; and
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring business. This normally means the worker will have established and promotes his or her own business; is licensed; does advertising; has other clients or potential customers; and the like.
What This Means
Although this test is new, the Court ruled that its decision was merely explaining existing law, which means it can and will be applied retroactively. In light of this, all California employers are well-advised to conduct a prompt audit of their use of contractors in light of the new standards. The expectation and intention of the decision is that large numbers of current contractors may not qualify for that status under the new test.
It remains to be seen how this ruling will affect joint employer or subcontractor relationships, in which a true contractor entity (such as a staffing company) is engaged but whose employees are subject to detailed direction by the retaining company. It is clear, however, that this ruling is intended to expand the populations of persons for whom tax deduction, statutory employee benefits, leave and discrimination benefits, and the like, are available, and that hiring companies could be exposed to statutory liability to the subcontractor’s employee, since it “suffered or permitted” them to work on its premises. It is not clear whether the rules on indemnification and reimbursement of expenses will be interpreted in the same fashion as the new rules on classification and taxation, but caution suggests these practices, and subcontractor indemnities, be examined as well.
Massachusetts Highest Court Rules that Taxicab Drivers Are Independent Contractors Under the Wage Act
The Massachusetts Independent Contractor statute is among the strictest in the country, and employers face an uphill battle in proving that individuals satisfy the three-prong test for correctly being classified as independent contractors. The test, however, is not impossible to surmount, as demonstrated by a decision issued earlier this week.
On April 21, 2015, the Massachusetts Supreme Judicial Court (SJC) held in Sebago, et al. v. Boston Cab Dispatch, Inc., et al., that taxicab companies may classify taxicab drivers as independent contractors. The plaintiffs in this case were taxicab drivers that leased taxis and medallions at a flat-rate from taxicab and medallion owners. The plaintiffs brought suit against three groups of defendants: taxicab and medallion owners, dispatch service companies and a taxicab garage. They claimed that the defendants jointly misclassified them as contractors rather than employees, entitling them to relief under Massachusetts’ minimum-wage and overtime laws.
The SJC ruled against the taxicab drivers. In reaching this conclusion, the court first addressed the issue of whether the defendants were joint employers. It held that the defendants should not be considered “as a single employer exercising monolithic control over the taxicab industry.” Instead, entities can formulate legitimate business-to-business arrangements to secure services, and this, on its own, does not render the entities joint employers. Thus, when analyzing claims under the independent contractor statute, the SJC explained that courts must look separately at each defendant’s relationship with the plaintiffs to assess potential liability.
Before determining whether the taxicab drivers were employees, the court assessed the threshold question of whether the taxicab drivers provided services to the defendants. The court held that the drivers provided no services to the garage, but that the drivers did provide services to the dispatch companies and the taxicab and medallion owners.
Next, the court turned its analysis to whether the dispatch companies and taxicab and medallion owners could lawfully classify the drivers as independent contractors under Massachusetts’ independent contractor statute. The SJC explained that all three of the following elements must be met in order for the defendants to prevail: (1) the drivers must be “free from control and direction in connection with the performance of the service,” both under their contracts and in fact; (2) the service being performed must be “outside the usual course of the business of the employer”; and (3) the drivers must be “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.”
Under the first prong, freedom from direction and control, the SJC determined that the drivers were mostly independent. The drivers selected their own shifts and which passengers to pick up or refuse. The court also found that the defendants satisfied the second prong because the drivers’ services were outside the usual course of the defendants’ businesses. The court reasoned that the medallion owners’ leasing businesses were not dependent on the success of the drivers’ operations. Rather, a driver paid a daily flat-rate to lease a taxicab, and the taxicab and medallion owner retained this fee regardless of how much money the driver earned on a given day. The court similarly found that the dispatch companies were not in the business of giving rides; instead, they were in the business of selling dispatch services to medallion owners.
Finally, under the last prong, the court found that the drivers engaged in an independent trade or business. Specifically, the drivers had the freedom to lease from whomever they wanted on whatever days they wanted. The drivers were not tied to particular medallion owners, and they were free to advertise their services as they wished. Because the defendants carried their burdens under all three prongs of the statute, the SJC ruled that the drivers were properly classified as independent contractors. A significant component of the court’s rationale was that regulations governing the taxicab industry recognized that drivers could be independent contractors as well as employees. Under this regulatory scheme, the entities–be it the taxicab and medallion owners, dispatch companies or the drivers themselves–are free to plan an arrangement that provides for either result.
Sebago is important because it reiterates that legitimate business-to-business relationships are outside of the stringent Massachusetts independent contractor statute. The plaintiffs’ bar will likely claim that the unique regulatory scheme covering the taxicab industry makes this case inapposite to misclassification disputes arising in other industries. However, the decision suggests that businesses in any industry will not be treated as employers for purposes of state wage laws when the services they provide are legitimately different from those provided by a contractor.
In a decision issued in late May 2013, the Massachusetts Supreme Judicial Court (SJC) held that plaintiffs who live and work outside of Massachusetts for Massachusetts-based companies can sue for purported violations of Massachusetts’ independent contractor law. In Taylor v. Eastern Connection Operating, Inc., the SJC held that out-of-state plaintiffs may bring suit where a written contract between the parties contains an enforceable Massachusetts choice of law and forum selection provision, and where Massachusetts law is not contrary to a fundamental policy of the state where the plaintiffs live and work. This ruling is particularly important because the Massachusetts independent contractor law sets more stringent criteria for engaging a worker as an independent contractor than many other states’ laws.
The SJC’s ruling arises out of a case brought by three individuals who live in New York but work for a courier company headquartered in Massachusetts. Under their contracts, they were classified as “independent contractors” who were to perform pickup and deliveries exclusively in New York. The contracts further provided that the contract and all rights and obligations of the parties were to be construed under Massachusetts law and that any lawsuits between the parties were to be brought in a court in that jurisdiction. In 2010, the plaintiffs brought a class-action lawsuit in Massachusetts Superior Court against the courier company, alleging that they were misclassified as independent contractors rather than employees in violation the Massachusetts independent contractor statute and that they were not paid wages and overtime in violation of the Massachusetts wage statute and overtime statute. The Superior Court dismissed the lawsuit, concluding that the Massachusetts independent contractor statute did not apply to non-Massachusetts residents working outside of Massachusetts and that, as independent contractors, the wage and overtime statutes did not apply to the plaintiffs.
On appeal, the SJC held that the choice-of-law provision in the contracts was enforceable, finding both that Massachusetts has a “substantial relationship” to the transaction between the plaintiffs and defendant given the defendant’s Massachusetts headquarters, and that the application of Massachusetts law would not contravene a fundamental policy of New York. Given the parties’ agreement, the Court concluded that the plaintiffs could assert a claim under the Massachusetts independent contractor statute. Furthermore, because the plaintiffs could ultimately be deemed employees rather than independent contractors under the statute, the plaintiffs may also be able to assert claims under the Massachusetts wage and overtime statutes.
The SJC’s decision greatly expands the potential liability of Massachusetts companies that have independent contractors and employees who live and work outside of Massachusetts. The decision makes clear that Massachusetts companies are not immune from claims under Massachusetts wage-and-hour statutes simply because their workers live and work outside of the Commonwealth. In light of the SJC’s decision, Massachusetts-based companies that have independent contractors or employees living and working outside of Massachusetts should carefully review their contracts and employee handbooks to assess whether those documents leave them exposed to potential liability under Massachusetts law.