The New Law in California on Who is an Employee and Who is an Independent Contractor 2024

This article was recently published in Bender's California Labor and Employment Bulletin. See B. Douglas Robbins, The Bogus Hiring Entity Defense to the ABC Misclassification Test, 2021 Bender’s Cal. Lab. & Emp. Bull. 243, 247 (2021).

In establishing the seismic shift to the Dynamex ABC labor misclassification standard, the Supreme Court of California referred to the putative employers as the “hiring entities.”[1] This phrase, argues employers, means that the ABC Test is moot unless and until plaintiffs can prove that the “hiring” business reviewed resumes, conducted placement interviews, and shook the workers’ hands declaring them “hired.” This interpretation effectively dismantles the entire ABC framework and is decidedly not what the Court had in mind.

THE ABC LEGAL STANDARD

In 2018 our Supreme Court set out the ABC Test for distinguishing contractors from employees under IWC Wage Orders.[2] A year later the California Legislature codified the Dynamex rule, expanded its reach, and made the ABC Test the exclusive test for all labor misclassification matters whether under the IWC Wage Orders, under the Labor Code, within unemployment insurance, or workers compensation proceedings.[3]

The rule works like this. In California, all workers are presumptively employees unless and until the “hiring entity” proves that, (A) “the worker is free from the control and direction of the hirer” and that, (B) “the worker performs work that is outside the usual course of the hiring entity’s business” and that(C) “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.”[4] Employers have latched on to the “hiring entity” language to argue that the ABC Test is not so much a three prong test as a four prong test, demanding plaintiffs satisfy a threshold inquiry into whether the defendant-company engaged in some sort of“hiring” activity. Thus, if a company is clever enough to engage a middle-entity to perform hiring and firing, then the ABC Test would not apply to them.[5] But this is just wrong. Multiple authorities concur.

THE JUDICIAL COUNCIL REJECTS
THE “HIRING ENTITY” ARGUMENT

Authored by the Judicial Council, the official CACI jury instructions conspicuously omit any discussion of this “hiring entity” threshold inquiry.[6]The Judicial Council’s membership includes Chief Justice Tani G. Cantil-Sakauye, author of the Dynamex decision, and numerous Justices of the California Courts of Appeal. The Judicial Council describes the ABC Test is an “affirmative defense” requiring the defendant to “prove all of the” A and B and C elements.[7]The CACI Instruction neither contemplates a “hiring entity” element nor discusses an optional “hiring entity” instruction in the “Directions for Use” subsection. These instructions do not exist because, as far as the Judicial Council is concerned, the “hiring entity” element does not exist.

THE COURT OF APPEAL CONCURS

When given an opportunity, the Court of Appeal concurred with the Judicial Council’s interpretation. Last year, defendants Uber Technologies Inc. (“Uber”) and Lyft Inc. (“Lyft”) argued in San Francisco Superior Court that, “that they [were] not ‘hiring entities’ within the meaning of A.B. 5 because their drivers do not provide services to them” and because Uber and Lyft “do not [directly] pay remuneration to drivers.”[8]The trial court responded to these arguments with a word:  “Nonsense.”[9]Law and Motion Judge Ethan Schulman explained:

Contrary to Defendants’ argument, A.B. 5 does not establish any “threshold requirement”to show that the putative employer is a hiring entity that must be met before applying the ABC Test. The ABC Test focuses on the individual worker, not on the employer . . . It is readily apparent that the legislation’s use of the undefined term “hiring entity” was intended to avoid using the term “employer,” and is synonymous with the more cumbersome phrase “the person to whom service is rendered” that was commonly used under the Borello test that predated the enactment of A.B. 5.[10]  

On appeal, the court affirmed.

Before the California Court of Appeal, again, “Uber and Lyft argue[d]” that “the threshold question in an ABC analysis is whether they are ‘hiring entities.’”[11]Again, the Court rejected the argument.[12]The Court elaborated that “[r]eading the term ‘hiring entity’ in context, we think the phrase is used in Dynamex and in section 2775 for its neutrality, so that it covers both employment status and independent contractor status, and thus does not presuppose an answer one way or another.”[13]The Court concluded “there are three steps to the ABC Test,” namely, A and B and C.[14]There is no “additional step in the ABC Test” and any suggestion to the contrary “is inconsistent with the holding in Dynamex.”[15] That is, the phrase “hiring entity” is simply another way of describing the “putative employer,” no more, no less.[16]

THE SUPREME COURT OF CALIFORNIA AGREES

Consistent with this interpretation, and ever since employers have been seeking to interject the “hiring entity” threshold issue into the ABC Test, the Supreme Court of California has been careful to deploy the expression “putative employer” synonymously with the phrase “hiring entity.” In Vazquez for example, the Supreme Court of California referred to the defendant subject to the ABC Test as the “putative employer” six times, explaining at one point that it is not “unfair to putative employers to apply the ABC standard to work settings that predate the Dynamex opinion.”[17]

In other words, when it comes to the ABC Test, there is nothing for the plaintiffs to prove. They start out, presumptively, as employees.[18]Meanwhile, the defendant starts out as the, “putative employer.”[19] As Judge Schulman cogently explained, “It is readily apparent that the legislation’s use of the undefined term ‘hiring entity’ was intended to avoid using the term ‘employer,’ and is synonymous with the more cumbersome phrase ‘the person to whom service is rendered.”[20]

THE LEGISLATURE AND JUDICIARY INTENDED
TO AMOELORATE MISCLASSIFICATION ABUSE

Whether we agree with the policy or not, the judiciary and the legislature intended to create a high wall for employers to scale. It its lengthy Dynamex decision, the Supreme Court remarked again and again of the harm done by improper labor misclassification, to workers, to the California tax base, and to the uncheating business competitors who do the right thing by their workers.[21]The Court described, at length, how the prior labor misclassification standard, under Borello “makes it difficult for both hiring businesses and workers to determine in advance how a particular category of workers will be classified,”[22] and criticized Borello’s complicated multi-factor test because it “affords a hiring business greater opportunity to evade its fundamental responsibilities under a wage and hour law.”[23]The Court believed it was fashioning a new rule, one that reflected the “exceptionally broad suffer or permit to work standard” promulgated by the IWC Wage Order, and one that would “protect the workers’ health and welfare . . . enable [them] to provide at least minimally for themselves and their families . . . and . . . accord them a modicum of dignity and self-respect.”[24]

In passing AB 5, the California Legislature wholeheartedly agreed:

It is . . . the intent of the Legislature in enacting this act to ensure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law . . . . By codifying the California Supreme Court’s landmark, unanimous Dynamex decision, this act restores these important protections to potentially several million workers who have been denied these basic workplace rights that all employees are entitled to under the law.[25]

The intent of the Supreme Court in Dynamex, and the intent of the Legislature in codifying Dynamex was not to weaken the misclassification law and make it harder for employees to prevail.

But if the “hiring entity” rule was the new misclassification standard in California, then it would be much easier—easier than under Borello[26]and easier than under Martinez[27]—for unethical businesses to classify their workers as contractors simply by engaging an intermediary staffing agency or labor broker. Ironically, this is exactly the kind of scheme that certain employers have used for decades in an attempt to dodge the Labor Code and skirt their tax obligations.[28]The Supreme Court was well aware of this particular scam. A law review article from the University of Pennsylvania cited seven times in the Dynamex decision, explains that one “common misclassification tactic[], include[es] the establishment of multiple tiers of subcontractors to shift liability and shield a general contractor; a widespread practice in the construction industry.”[29]

Employers would have us insert a “hiring entity” threshold question into the ABC Test under the assumption either that the Judiciary and the Legislature were purposefully trying to erode labor protections for employees and increase the number of independent contractors in our state, or that the ABC Test accidentally does so. But neither of these explanations seem likely. The ABC Test was the result of a ten month review by the Legislature, passing 61 (ayes) to 16 (noes) in the Assembly—by 80% of the votes—and 29 (ayes) to 11 (noes) in the Senate—by 72% of the votes. Dozens of the state’s brightest lights have reviewed and approved the ABC Test, including an unanimous Supreme Court and the Governor of the State. The notion that they all sought to create a worker-friendly rule but inadvertently created the opposite, is highly unlikely.

CONCLUSION

Advocates for employers routinely argue that presumptively classifying workers as employees instead of contractors is “unfriendly to entrepreneurs,” constituting a kind of “financial gut punch [to] businesses.”[30]This is code for a more plain-spoken truth: bosses want to pay their workers less so they can keep more. This is hardly new news. But in the post-war period, our country did quite well, both for the wealthy and the working class, by keeping wealth inequities under control.[31]Protecting workers as employees under the Labor Code was part of that success.

As employers seek to gorge on greater and greater slices of the pie, through dubious interpretations of the California Labor Code, the costs are borne not just by the workers. According to the State of California’s Department of Industrial Relations, labor misclassification schemes “cost[] the state over $7 billion annually.”[32] In this way, misclassification malfeasance is subsidized by the California taxpayer. Some of those tax payers are entrepreneurs. And some of those tax payers are lawfully-operated businesses who hire their workers as employees and treat them in compliance with the Labor Code. These are not the kinds of businesses that will suffer a “financial gut punch” when their competition start complying with the law too.

In the ABC Test, the judiciary, the legislature, and the executive have spoken. This may be good news for employees but it may also be good news for honest business too. Many have been doing the right thing for some time. They may soon enjoy a level playing field as their competition begins doing the same.

[1] Dynamex Operations W. v. Superior Court, 4 Cal. 5th 903, 955 (2018).

[2] Id.

[3] Cal. Lab. Code § 2775(b)(1).

[4] Dynamex Operations W., 4 Cal. 5th at 916–17; Cal. Lab. Code § 2775(b).

[5] “Dynamex clearly articulated that the test applies only when the alleged employer is a ‘hiring entity.’” Paul Marron and Steven C. Rice, Vazquez’s Retroactivity Holding Creates Unintended Consequences for Independent Contractors, Cal. Lab. Emp. L. Rev., May 2021, at 6,8.

[6] See CACI 2705.

[7] See id.

[8] People v. Uber Technologies, Inc., No. CGC-20-584402, 2020 WL 5440308, at *11(Cal. Super. Ct. Aug. 10, 2020).

[9] Id.

[10] Uber Technologies, Inc., 2020 WL5440308, at *11. The trial court also rejected Uber and Lyft’s “hiring entity” interpretation because it ran contrary to the intent of AB 5:  “the Legislature . . . intended to broaden the definition of an employee . . . [not] negate or undermine that objective by at the same time narrowing the category of businesses responsible for hiring workers.” Id. (emphasis added).

[11] People v. Uber Techs., Inc., 56 Cal. App. 5th 266, 307 (2020).

[12] “We reject defendants’ invitation to import a threshold ‘hiring entity’ inquiry . . . .” Id.

[13] Id. at 308.

[14]Id.

[15]Id.

[16] Id. Since this decision, Proposition 22 amputated Uber and Lyft’s “app-based drivers[s]” from the rubric of the ABC Test altogether. Cal. Bus. & Prof. Code § 7451. The Proposition, however, did not affect the meaning of the phrase “hiring entity” under the ABC Test as interpreted by People v. Uber Technologies Inc.

[17] Vazquez v. Jan-Pro Franchising Int’l, Inc., 10 Cal. 5th 944, 958 (2021).

[18]“The ABC Test presumptively considers all workers to be employees . . .” Dynamex Operations W., 4 Cal. 5th at 955; see Cal. Lab. Code § 2775(b)(1).

[19]Vazquez, 10 Cal. 5th at 958.

[20] Uber Technologies, Inc.,2020 WL 5440308, at *11.

[21] Dynamex Operations W., 4 Cal. 5th at 913.

[22] Id.at 954.

[23] Id. at 955.

[24] Id. at 952.

[25] Assem. Bill No. 5, § 1 (2019-2020 Reg. Sess.).

[26] S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341, 350 (1989) (defining the employer as the party who exercised the “right to control” the worker’s labor).

[27] Martinez v. Combs, 49 Cal. 4th 35, 69 (2010) (holding that under IWC Wage Orders an “employer” is a “proprietor who knows that persons are working in his or her business” regardless of whether those persons “hav[e] been formally hired” and thus, “suffers or permits that work by failing to prevent it, while having the power to do so”).

[28] See Sen. Rules Comm., Off.of Sen. Floor Analyses, 3d reading analyses of Assem. Bill No. 5, at 15 (2019-2020 Reg. Sess.) (discussing misclassification schemes in the construction industry and citing to Sinking Underground); see also Yvonne Yen Liu et al., Sinking Underground, at 26 (2014) (discussing how employers use “labor brokers” in order to try to avoid duties under the labor code and the tax code).

[29] Anna Deknatel & Lauren Hoff-Downing, ABC on the Books, 18 U. Pa. J.L. & Soc. Change 53, 72 (2015).

[30] Paul Marron and Steven C. Rice,Vazquez’s Retroactivity Holding Creates Unintended Consequences for Independent Contractors, Cal. Lab. Emp. L. Rev., May 2021, at 6, 7 & 8.

[31]“In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. Economically, it was a golden period. Middle-class incomes grew at roughly the same rate as those of the richest Americans.” Gabriel Zucman and Gus Wezerek, This is Tax Evasion, Pure and Simple, N.Y. Times (Jul. 7, 2021), https://www.nytimes.com/interactive/2021/07/07/opinion/minimum-corporate-tax.html.

[32] Sen. Rules Comm., Off. of Sen. Floor Analyses, 3d reading analyses of Assem. Bill No. 5, at 15 (2019-2020 Reg. Sess.).

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