The California Supreme Court gave employers across the state a case of serious heartburn when it issued its ruling in Dynamex Operations West, Inc. v. Superior Court earlier this year. The decision amounts to a seismic change in the law that makes it very difficult for employers in certain industries and occupations to demonstrate that their workers are independent contractors rather than employees. But while the decision carries wide-ranging implications for private — sector employers in California-particularly those engaged in the gig economy — employers in the public sector shouldn’t reach for the antacids just yet.
Easy as ABC?
In Dynamex, a group of drivers brought a class action against their employers asserting it deprived them of certain entitlements under California law by misclassifying them as independent contractors rather than employees. The California Supreme Court adopted a brand-new three-part test that “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 in question satisfies each of three conditions”:
(A) The hiring business has no control and direction over the performance of the work, both under the contract and in fact;
(B) The work is outside the usual course of the hiring entity’s business; and
(C) The worker customarily engages in an independent business of the same nature as the work performed for the hiring process.
Although Part A of the test largely resembles the preexisting common-law standard for employee classification, Parts B and C constitute a major shift in the law that is sure to wreak havoc on many private-sector companies, especially those in the gig economy.
Dynamex‘s impact in public sector is less pronounced
The ABC test announced in Dynamex will carry fewer consequences for public-sector employers than for private-sector employers. By its own terms, the decision is limited to “workers who fall within the reach of the wage orders” — that is, legally binding orders that govern “obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees” in certain industries and occupations.
Fourteen of California’s 17 Wage Orders specifically exempt “employees directly employed by the State or any political subdivisions thereof, including any city, county, or special district,” and courts have interpreted another Wage Order governing miscellaneous employees to exempt public employees. Moreover, charter cities, charter counties, and general law counties may rely on the “home rule doctrine” — which gives certain local entities control over employment matters despite conflicting state law — although some courts have found otherwise on this issue depending on whether the duties of the workers at issue implicate a statewide interest.
Dynamex is not to be ignored
Even though the new test has less impact on many public-sector employers, everyone should review their worker classifications under the ABC test announced in Dynamex for several reasons.
First, although 14 of California’s Wage Orders expressly exempt public employees, minimum wage obligations still apply “to all employees in the occupations described therein, including employees directly employed by the state or any political subdivision of the state.” Second, public-sector employers aren’t exempt from the meal and rest break requirements in the transportation Wage Order for “commercial drivers employed by governmental entities” except for “public transit bus driver[s] covered by a valid collective bargaining agreement” that meets certain criteria.
Finally, courts may extend the Dynamex test to other worker classification contexts that would have profound consequences for public-sector employers — for example, with regard to the responsibility for paying federal Social Security and payroll taxes, paying unemployment taxes and state employment taxes, and providing workers’ compensation insurance. The decision might also affect retirement contributions under the Public Employees’ Retirement Law.
Although classification decisions in those contexts aren’t currently determined by the new ABC test, the language in Dynamex characterizing misclassification as a “very serious problem” may provide a basis for courts to extend the test beyond the context of the Wage Orders in the future.
The supreme court’s decision in Dynamex will have an immediate impact on employers that are subject to California Wage Orders. But public-sector employers can breathe slightly easier than their private-sector counterparts because they are exempt from most of the obligations in the Wage Orders. That said, public employers should nevertheless immediately determine whether they need to reclassify, in accordance with the new ABC test, any workers who make less than minimum wage, serve as commercial drivers, or work in household or agricultural occupations. And they should be vigilant of the possibility that courts may extend the test to other contexts in the future.
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