Supreme Court Rules in Independent Contractor Misclassification Case

On April 30, the California Supreme Court issued a ruling in Dynamex Operations West, Inc. v. Superior Court related to the classification of workers as independent contractors or common law employees.

The court’s ruling emphasized the importance of the issue by stating that misclassification results in a financial burden to workers and loss of labor law protections. Further, the court stated that employers who misclassify workers as independent contractors have an unfair competitive advantage over other employers, since they don’t have the cost of complying with any of the following:

  • Federal and state labor laws
  • Federal Social Security and payroll taxes
  • Unemployment insurance and state employment taxes
  • Workers’ compensation insurance requirements

The case involved drivers for a package and document delivery company. In 2004, Dynamex adopted a policy in which all delivery drivers were classified as independent contractors. Dynamex obtained the customers, set the delivery rates and determined the delivery assignments. The drivers were permitted to set their own schedules but had to inform Dynamex of the days they intended to work. The drivers were permitted to hire assistants but had to pay for the assistants themselves. The drivers had to provide their own vehicles and pay for transportation costs (fuel, tolls, vehicle maintenance and vehicle insurance). The drivers were required to purchase and wear Dynamex uniforms. In some cases, the drivers were required to attach Dynamex logos to their vehicle.

The Supreme Court ruled that the drivers were misclassified and were, in fact, common law employees. The determination was based on the following three-prong test. Importantly, this ruling establishes a new standard for employers when determining whether workers are independent contractors or employees. In the past, the determination was based on a totality of facts analyzed through a multiple-factor standard. Under the new test, workers are presumed to be common law employees. They can only be classified as independent contractors if they satisfy all three of the following conditions:

  1. 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 such work
  2. That the worker performs work that’s outside the usual course of the hiring entity’s business
  3. That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity

Importantly, the ruling specifically only applies for purposes of California wage orders (minimum wage, maximum hours, meal and rest breaks). It doesn’t directly apply to eligibility for group health plan coverage under ERISA and the ACA’s employer mandate. However, an employer will need to carefully consider the consequences of reclassifying a worker from an independent contractor to a common law employee. The employer mandate requires large employers (those with 50 or more full-time employees, including equivalents) to offer minimum value, affordable coverage to common law employees working 30 hours or more per week. If an employee has been reclassified as a common law employee, the employer will likely need to offer them coverage if they’re working full-time hours. Otherwise, the employer could be at risk for a penalty under the employer mandate. Depending on the percentage of affected workers, the employer could be at risk for the more costly Penalty A for failure to offer coverage to substantially all full-time employees (95 percent).

An employer who wishes to review their employee classifications should contact outside counsel. If workers are found to be misclassified, there may be previous tax liability and filings to be addressed as well as future benefit offerings and labor law protections.

Dynamex Operations West, Inc. v. Superior Court »