United States: California Court Of Appeal Clarifies Application Of The ABC Test For Independent Contractors

On May 15, 2018, we issued a client alert on the California Supreme Court's decision in Dynamex Operations v. Superior Court. The Dynamex decision drastically altered the applicable standard used for the past three decades to evaluate a worker's proper classification as an employee or independent contractor.

The new and more stringent classification test, commonly called the "ABC Test," presumes workers are employees as opposed to independent contractors, unless the employer can prove that the following three factors are met: (1) the worker is free from the control and direction of the presumed employer in connection with the work performed, both under the contract and in fact, and (2) the worker performs work outside the usual course of the presumed employer's business, and (3) the worker is "customarily engaged" in an independently established trade, occupation, or business as the work he or she is performing for the presumed employer.

The Dynamex decision raised many questions regarding the applicability and scope of the ABC Test. In Garcia v. Border Transportation Group, LLP, the California Court of Appeal clarified that the ABC Test only replaced the Borello Test as applied to wage and hour claims brought under the Industrial Welfare Commission (IWC) Wage Order. The more forgiving multi-factor Borello Test is still the applicable standard in non-wage and hour claims to determine whether a worker is an independent contractor or employee. Furthermore, the Garcia court clarified that the third prong of the ABC Test is only satisfied if the worker is actively engaged in an independent business, not if the worker could have engaged in an independent business or was permitted to engage in an independent business.

Garcia v. Border Transportation Group, LLP

The plaintiff in Garcia worked as a taxi driver for Border Transportation Group, LLP (BTG) and was classified as an independent contractor. The plaintiff filed suit against BTG and individual defendants for the following claims: (1) Wrongful Termination in Violation of Public Policy; (2) Unpaid Wages; (3) Failure to Pay Minimum Wage; (4) Failure to Pay Overtime; (5) Failure to Provide Meal and Rest Breaks; (6) Failure to Furnish Accurate Wage Statements; (7) Waiting Time Penalties; and (8) Unfair Competition (UCL).

Initially, the trial court granted the defendants' motion for summary judgment, holding that all of the plaintiff's causes of action necessarily failed, as the plaintiff was an independent contractor under the Borello Test. The plaintiff appealed the trial court's ruling.

After briefing on the plaintiff's appeal was complete, but before the appellate court ruled on the appeal, the California Supreme Court issued its ruling in Dynamex which held that the ABC Test should be used instead of the Borello Test in certain instances. The Garcia court reversed the trial court's order, holding that summary adjudication was appropriate only as to the plaintiff's non-wage order claims, but proper as to his wage order claims.

The Garcia court held that the Dynamex ruling was meant to clarify the meaning of the "suffer or permit to work" language specifically contained within the wage order, without deciding what standard applied to classification under non-wage order claims. As a result, the Dynamex decision did not reject Borello outright. Thus, the Garcia court only applied the ABC Test to the following five wage order claims contained within the plaintiff's eight causes of action: unpaid wages, failure to pay minimum wage, failure to provide meal and rest periods, and failure to furnish itemized wage statements. The Garcia court found that, under the ABC Test, the plaintiff was deemed an employee for the purpose of these five claims. Summary adjudication was upheld for the remaining three causes of action, as Plaintiff was deemed an independent contractor when weighing the 11 Borello factors.

The Garcia court also held that the defendants had not met their burden of showing that the plaintiff was customarily engaged in an independently established trade, occupation or business (the third prong of the ABC Test). The court noted that the critical distinction in this prong is the requirement that the worker is actively engaged in an independent business, not that he or she could have become so engaged. Thus, whether BTG prohibited or permitted the plaintiff from engaging in an independently established business was irrelevant. Rather, the key consideration was whether the plaintiff had actively engaged in an independent business. As there was no evidence that the plaintiff "in fact provided services for other entities 'independently' of his relationship with BTG," the defendants could not meet all three requirements of the ABC Test.

Impact of the Decision

The Garcia court's decision that the ABC Test is only applicable to wage order claims may help with pending litigation, as classification will be evaluated under a less strict standard for non-wage order claims, thus easing the magnitude of liability to employers. Moving forward, however, employers should still reclassify workers as employees who do not undoubtedly meet all three requirements of the ABC Test.

The ABC Test still creates the presumption of an employer-employee relationship for wage and hour claims, for which employers want to avoid liability. We expect to see continued litigation regarding scope and applicability of the ABC Test and will continue to report on developments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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