A unanimous decision Monday by the California Supreme Court appears to require companies like Uber and Lyft to treat their drivers as employees, who must therefore be paid no less than the state’s minimum wage and be reimbursed for their vehicle expenses. In Dynamex Operations West v. Superior Court, the court simplified and clarified the rules governing which workers are “employees” protected by state wage and hour law rather than unprotected “independent contractors.”
In an 80-page opinion, the court adopted for California the so-called “ABC Test,” a rule already in use in Massachusetts and New Jersey, which is more employee-protective than the old California law or some federal laws. Under the ABC test, workers are presumed to be employees protected by law requiring payment of the state minimum wage and premium pay for overtime hours. A hiring business can evade compliance with wage and hour law by designating its workers as independent contractors only if it can show:
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 the work and in fact; and
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 that involved in the work performed.”
If the hiring business fails to prove any one of the three elements, the workers are employees entitled to minimum wage and premium pay for overtime work and to reimbursement for business expenses such as the cost of using a vehicle to conduct the business.
Under the new California ABC rule, the court decreed, a worker can properly be treated as an independent contractor “only if the worker is the type of traditional independent contractor—such as an independent plumber or electrician—who [c]ould not reasonably [be] viewed as working in the hiring business.” This kind of truly independent contractor would be “realistically understood, instead, as working only in his or her own independent business.”
An example of a true independent contractor relationship, the court said, would be when a business hires a plumber to repair a leak or an electrician to replace wiring. In contrast, to illustrate an employment relationship, the court offered the examples of a clothing company that hires people to work at home making clothes from designs supplied by the manufacturer, or a bakery that hires cake decorators on a regular basis to decorate cakes. In both of these situations, the court explained, the workers are part of the company’s regular business even though they work off the company premises, on their own schedule, and with little supervision.
The case on which the court ruled involved delivery drivers whom Dynamex treated as employees until 2004, when it reclassified its drivers as independent contractors. Dynamex allowed its drivers to designate which days they worked, so long as they provided advance notice, and to plan their own routes and to hire assistants to deliver packages, so long as they completed all deliveries on the scheduled day. As independent contractors, drivers were responsible for all the costs of the delivery vehicle, including insurance, gas, tolls, and maintenance.
The California Supreme Court determined the drivers are employees. The court emphasized Dynamex could not establish that the drivers are independent contractors under either part B or part C of the test. Under part B, the court explained, Dynamex is a delivery company and the drivers perform the delivery services that are essential to the business. Dynamex “obtains the customers for its deliveries, sets the rate that the customers will be charged, notifies the drivers where to pick up and deliver the packages, tracks the packages, and requires the drivers to utilize its tracking and recordkeeping system.” Under part C, the drivers are not independent contractors because they did not perform delivery services for any other company. Because they are employees, the court said, the drivers are entitled to be paid the state minimum wage, premium overtime pay for hours worked in excess of 8 in a day or 40 in a week. The court also ruled that Dynamex is required to reimburse them for the cost of operating the vehicle they use for deliveries.
The Dynamex case appears to doom the arguments that Uber and other app-based gig economy companies, as well as trucking, logistics, and package delivery companies, have been making about why their drivers are independent contractors. Whether the companies provide for-hire rides or delivery services or trucking and logistics or some other service, so long as the company obtains the customers, sets the rates the workers may charge, and requires the workers to use its systems for tracking service, the workers are employees. Uber has been arguing that it is a technology company, not a ride-hailing company, and therefore its drivers are not performing the core services of its business. The court’s reasoning in Dynamex suggests that argument will fail: The fact that a ride-hailing or delivery company uses technology, including its own app and software, to power its business is irrelevant. The heart of Uber is rides; the heart of Postmates is food delivery; the heart of Federal Express is package delivery. In each case, the drivers appear to be employees for purposes of California wage and hour law.
The court’s ruling does not affect workers outside of California, nor does it affect federal law. Neither does it change any California law other than wage and hour law—it does not change who is protected by workers’ compensation law, for instance, or who is entitled to meal and rest breaks, or other California laws that protect employees and exclude independent contractors. But it suggests that the California Supreme Court may think the benefits of clarity and simplicity of application, and stronger protection for workers, should be extended to other California laws. Finally, because the California Supreme Court is the last word on California law, Dynamex cannot appeal to the United States Supreme Court. Unless or until the California legislature enacts a new law that defines “employee” more narrowly, the ABC test will govern in California wage and hour cases.
In its Monday ruling, the court upheld a lower court decision that allowed a group of Dynamex drivers to file a class-action suit for back pay against the company. Allowing the group to proceed as a class under the ABC standard may lead Dynamex to settle with the drivers because the members of the class and the amount they are owed should be able to be calculated from Dynamex’s own pay records. The ruling will also affect many other cases pending in courts and before arbitrators against companies that have allegedly misclassified employees in California.