Independent Contractor v. Employee. The “ABC Test” Does Not Include a Threshold Hiring Entity Test



In 2018, in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), the California Supreme Court overturned nearly thirty years of jurisprudence governing the manner in which workers are classified as employees or independent contractors. The Dynamex decision replaced the “Borello test,” derived from a case of the same name, S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), in which the California Supreme Court at the time set forth a variety of factors to be considered when determining whether a worker was an employee or independent contractor.


The Dynamex decision replaced with the “Borello test” with the “ABC test.” Under the ABC test, a worker can be deemed an independent contractor if three conditions are met:

  1. 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;

  2. The worker performs work that is outside the usual course of the hiring entity’s business; and

  3. The worker is customarily engaged in an independent established trade, occupation, or business

In 2019, California’s employee-friendly state legislature enacted AB 5 which codified the Dynamex decision. Dynamex and AB 5 created an uproar in the “Gig economy” and in 2020 new-economy companies such as Uber, Lyft, DoorDash and Instacart, whose business models rely on classifying workers as independent contractors, spent a record $200 million on the successful passage of Proposition 22 which exempted such gig economy companies from having to classify their workers as employees.


The “ABC test,” however, remains the law of the land for other industries including the construction industry, although it will likely take years of jurisprudence to even out its rough edges. One rough edge, discussed in the next case, Mejia v. Roussos Construction, Inc., 76 Cal.App.5th 811 (2022), is whether the “ABC test” requires a worker-plaintiff to prove that they were hired by the defendant-hirer in the first place.


The Mejia Decision


Plaintiff flooring installers sued general contractor Roussos Construction Inc. (“Roussos”) claiming that they were employees of Roussos but were not provided with overtime wages, meal and rest periods, and other benefits employees are entitled to.


The dispute largely tuned on the status and function of three individuals who stood between the plaintiffs and Roussos. Plaintiffs called them “supervisors” while Roussos called them “subcontractors.” According to Roussos, the three individuals were subcontractors to Roussos and these three individuals rather than Roussos was responsible for complying with labor laws. According to the plaintiffs, the three individuals were a sham, and that “Roussos had employed a misclassification scheme, whereby it placed a ‘man in the middle” between the company and the flooring installation employees.


At trial, over the objection of the plaintiffs, the trial court gave jury instructions instructing the jury that they must first determine that the plaintiffs were hired by Rousso before they could determine whether the plaintiffs were employees or independent contractors under the “ABC test.” Based on the jury instructions, the jury found in favor of Roussos, finding that the plaintiffs were never hired by Roussos to begin with.


The plaintiffs appealed.


The Appeal


On appeal, the plaintiffs argued that the trial court erred in instructing the jury that before the “ABC test” is considered that plaintiffs were required to first prove that they were hired by Rousso. The Third District Court of Appeal agreed.

Reviewing the Dynamex decision, the Court of Appeal held:

Reading Dynamex, we do not think a threshold hiring entity test was intended. While the Dynamex court repeatedly refers to the party shouldering the burden as the “hiring entity,” it never suggests that the term was intended to limit the scope of the test. Rather, as the court explained, the ABC test is an application of the “suffer or permit to work” standard, under which, “[a] proprietor who knows that persons are working in his or her business without having been formally hired … clearly suffers or permits that work by failing to prevent it, while having the power to do so.” Interpreting the Dynamex court’s ABC test to include a threshold hiring test, with the worker bearing the burden, would also run counter to the intent of the California wage and hour laws, which “are remedial in nature and must be liberally construed in favor of affording workers protection.” We therefore conclude the term “hiring entity” was selected for its neutral connotations and not as an unannounced prerequisite to the ABC test.

Conclusion


So there you have it, the “ABC test” does not include a threshold hiring entity test. I’ve got some mixed opinions about this decision. On one hand, I think the Mejia decision effectively addresses the “man in the middle” situation in the case. On the other hand, I think the decision could create a situation where plaintiffs “jump over” hirers to sue the hirer with the deepest pocket which would impact innocent contractors who may subcontracted with less than law-abiding subcontractors.


Historical Note: The photograph above was taken during the “Hard Hat Riot” on May 8, 1970 when construction workers waving American flags and chanting “All the way, U.S.A” made their way through antiwar demonstrators in New York City’s financial district.

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