Dynamex and the Erosion of Independent Contractor Classifications

Employment Law

Earlier this year, the California Supreme Court issued a unanimous ruling regarding the test to be used in determining whether a worker is an “employee” or an “independent contractor” in the context of the California Wage Orders. The Court in Dynamex Operations West, Inc. v. Superior Court established a test which heavily favors workers being classified as employees.

Dynamex, a nationwide courier and delivery service, previously classified its California drivers as employees and then later, in an effort to cut its costs, converted those same drivers to independent contractors. One of those converted drivers filed a class action alleging several wage and hour claims, based on the misclassification of its workers, under the California’s Wage Orders. The California Supreme Court granted review to review and determine the appropriate test for determining the classification of workers in California for the Wage Orders. The Court’s decision in Dynamex and the stringent requirements that must now be satisfied to classify a worker as an independent contractor (known as the ABC Test), greatly changed the landscape in worker classification in California under the Wage Orders.

The ABC Test begins with the presumption that a worker is an independent contractor. The test deplaces the burden on the hiring company to demonstrate that the worker is in fact an independent contractor. In order to establish independent contractor classification, the hiring company must demonstrate that the worker meets each part of the following three prong test:

(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 (i.e., in practice); 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 the work performed.

In the context of prong A, the Dynamex Court discussed the case of Great N. Constr., Inc. v. Dept. of Labor, stating that the construction company “established that [the] worker who specialized in historic reconstruction was sufficiently free of the company’s control to satisfy part A of the ABC test, where [the] worker set his own schedule, worked without supervision, purchased all materials he used on his own business credit card, and has declined an offer of employment proffered by the company because he wanted control over his own activities.”

Prong B of the ABC Test, that a worker performs work that is outside the usual course of the hiring entity’s business, will be perhaps the most difficult prong for employers to satisfy. The Court provided several examples of the application of this prong.  First, the Court stated that when a retail store hires a plumber to perform repairs in the bathroom on its premises, the services of that plumber are not part of the retail store’s usual course of business and the store would not reasonably be seen as having permitted that plumber to provide services to it as an employee.  As another example, the Court discussed a seamstress hired by a clothing company to make dresses from the cloth and patterns provided by the hiring company, which would then be sold by the hiring company. Unlike the plumber example, the seamstress duties do not satisfy prong B of the ABC Test because the seamstress is performing work that is part of the hiring company’s usual business operation.

Prong C requires that the hiring company demonstrate that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.  The Court held that the term “independent contractor” refers to individuals who make the decision to go into business for him or herself, and take steps to advertise and promote the independent business.  Evidence in support of this prong may include the worker’s own business licenses, business incorporation, advertisements, and offerings to provide those services to the public at large or to other companies.

The hiring company bears the burden to prove that a worker is an independent contractor for the purpose of the Wage Orders, and the hiring company’s failure to prove any one of the three prongs of the ABC Test will lead to the classification of the worker as an employee.

While the ABC Test arguably provides clearer guidelines for the classification of workers pursuant to the Wage Orders, companies may find that the workers they currently classify as independent contractors cannot satisfy each prong of the ABC Test.  Dynamex has the potential to effect any company that relies on independent contractors, and businesses that do utilize independent contractors should immediately reassess those classifications to make sure they are in line with each of the three prongs as to workers who are non-exempt employees.  Misclassification of workers may lead to penalties, including payment of back payroll taxes, subject to interest and a penalty on unpaid taxes, criminal penalties for failure to withhold and pay payroll taxes, Labor Code section 226.8 penalties for willful misclassification (between $5,000 to $25,000 for each violation), as well as penalties by the IRS.

California Employers are No Longer Allowed to Inquire About an Applicant’s Criminal History Prior to Making a Conditional Offer of Employment

California law

Assembly Bill 1088 (“AB 1088”), signed by Governor Jerry Brown on October 14, 2017, took effect on January 1, 2018, and added a section to California’s Fair Employment and Housing Act (“FEHA”) restricting an employer’s ability to make hiring and personnel decisions based on the applicants criminal history or conviction record.

AB 1088, applicable to government and private employers with five or more employees, makes it unlawful for employers to include any questions about an applicant’s conviction history before extending a conditional offer of employment (which includes oral questions during an interview)[1].  Employers are also prohibited from considering, distributing, or disseminating information about any of the following when conducting a criminal history background check in connection with any application for employments: (i) an arrest that did not result in a conviction, subject to the exceptions in Labor Code §§ 432.7(a)(1) and (f); (ii) referral to or participation in a pretrial or post trial diversion program; and (iii) convictions that have been dismissed, expunged, sealed, or otherwise vacated pursuant to law.

Pursuant to AB 1088, an employer can consider an applicant’s criminal history after the employer has made a conditional offer of employment, however, an employer cannot deny the applicant a position based on the applicant’s conviction history until the employer performs an in depth “individual assessment” considering all the specified circumstances and information.  To that effect, AB 1088 set forth specific steps the employer must take in performing this individual assessment.  Specifically, the employer must determine whether the conviction history has a “direct and adverse relationship” with the specific job duties and, in doing so, must consider (i) the nature and gravity of the offense, (ii) the time that has elapsed since the offense or the completion of the sentence, and (iii) the nature of the job sought.

Once this individualized assessment is completed, the employer must then notify the applicant, in writing, of the preliminary decision to disqualify the applicant for the position due to the applicant’s criminal history.  AB 1088 mandates that this written notification (i) identify the disqualifying conviction(s) that is the bases for the preliminary decision to rescind the conditional employment offer, (ii) provide a copy of the conviction history report, if any, (iii) explain the applicants right to respond and challenge the accuracy of the conviction history and/or provide evidence of mitigating circumstances or rehabilitation, and (iv) provide a deadline of no less than five business days after providing the notice for the applicant to respond.

Once this notice is provided pursuant to AB 1088, the employer cannot make any final determinations until the expiration of the response window provided in the written notice (i.e., no less than five business days).  If the applicant timely notifies the employer, in writing, that they would like to challenge the conviction history and is taking steps to gather all necessary evidence to support their challenge, the employer must provide the applicant with an additional five business days to respond to the notice.  The employer must also consider any additional evidence or documents the applicant provides the employer in challenging the disqualification before making a final determination or decision.

If the employer ultimately decides to deny the applicant the position after reviewing any mitigating or other evidence submitted by the applicant in challenging the disqualification, the employer must again notify the applicant in writing of their final decision.  Pursuant to AB 1088, this notice must notify the applicant of (i) the final decision or determination, (ii) the employers procedure for challenging the decision or to request a reconsideration (if any), and (iii) the right to file a complaint with the Department of Fair Employment and Housing.  This notice may again provide the applicant with an explanation or justification for making the final decision, however, this is not a requirement under AB 1088.  If the applicant files a lawsuit or civil action against a potential employer for a violation of AB 1088, the applicant may sue for the full range of damages available under FEHA, including compensatory damages and attorney’s fees and costs.

In order to comply with the new restrictions set forth in AB 1088, California employers (with five or more employees) should review their written employment applications and their oral interview questions to determine whether or not they seek an applicant’s criminal history, and if they do, revise to remove all such questions. Employers who intend to use criminal background checks or conviction reports after a conditional offer of employment should also revise or create written preliminary decision and final decision notices that are in compliance with the requirements of AB 1088.  Finally, those employees utilizing the service of recruiters or “head-hunters” should ensure that they are also readily familiar with the provisions and restrictions of AB 1088 to confirm that they are also in compliance with those requirements.

[1] AB 1088 does not apply to (i) a position for which a state or local agency is otherwise required by law to conduct a criminal background check; (ii) a position within a criminal justice agency, as defined in section 13101 of the Penal Code; (iii) a position as a Farm Labor Contractor, as defined in section 1685 of the Labor Code; and (iv) a position where an employer or agent thereof is required by any state, federal, or local law to conduct criminal background checks for employment purposes.