An Initial Threshold Test Is Not Required in Order to Apply the “ABC Test” in Dynamex

Introduction

In the past few years, California employers and courts have grappled with the impact of Dynamex Operations West, Inc. v. Superior Court, which altered the independent contractor landscape. Dynamex ushered in a new “ABC test” and upended the long-standing Borello multi-factor test, which had previously been applied to determine if a worker was an employee or an independent contractor. With the ABC test, employers have questioned whether a worker, in a misclassification lawsuit, must meet an initial threshold hiring entity test before the employer is expected to establish the ABC test to prove independent contractor status. On March 25, 2022, the California Court of Appeal held in Jose J. Mejia, et al. v. Roussos Construction, Inc. that workers are not required to first establish that they were hired by the employer before the employer has the burden of satisfying the ABC test.

Background

The Mejia case involved unlicensed flooring installers that installed floors on behalf of Roussos Construction Inc. (“Roussos”), a construction company. Between the flooring installers and Roussos were three individuals that acted as intermediaries or middlemen for the flooring installers. The flooring installers called these three individuals their supervisors, whereas Roussos considered these three individuals to be independent subcontractors. 

Because these individuals or subcontractors hired and paid the other flooring installers, Roussos maintained that any mistakes in categorizing the flooring installers or complying with labor laws were solely the subcontractors’ responsibility. There was also no written contract between Roussos and the individuals, but these individuals agreed to either provide labor for the flooring installation, engage with other subcontractors to work on projects or utilize independent installers for the projects. The flooring installers ultimately argued that Roussos misclassified them as independent contractors and subsequently filed suit in Sacramento County Superior Court.

At trial, the parties disagreed on whether the jury should receive jury instructions on whether the flooring installers were hired by Roussos or any agent of Roussos’. Roussos adamantly argued that the jury should first make this determination before it was expected to establish the elements of the ABC test and noted the fact that the Dynamex court utilized the term “hiring entity” over 40 times, thereby emphasizing the point that the act of hiring by the hiring entity is “a critical factor in determining liability for misclassifying a worker.” The trial court sided with Roussos and agreed that a “predicate finding of whether or not Roussos was the hiring entity” was necessary before application of the ABC test.

After a favorable defense verdict resulted for the employer, the plaintiffs appealed to the California Court of Appeals, Third District, contending the trial court erred in its instruction to the jury regarding application of the initial threshold test. The appeals court agreed with plaintiffs and found that the trial court had ultimately made an error.  

“Suffer or Permit” Standard

To reach its decision, the appeals court highlighted Dynamex’s analysis of the “suffer or permit” standard. The Court noted that the “suffer or permit” language was initially derived from early twentieth-century child labor statutes, which “imposed liability even when no common law employment law existed between the minor and the defendant, based on the defendant’s failure to exercise reasonable care to prevent child labor from occurring.” Although the Dynamex court repeatedly referred to the party shouldering the burden as the “hiring entity,” the appeals court did not find that Dynamex intended to limit the scope of the ABC test by utilizing the term “hiring entity.” Rather, 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.” “Treating all workers whose services are provided within the usual course of the hiring entity’s business as employees is important to ensure that those workers who need and want the fundamental protections afforded by the wage order do not lose those protections.”

The Court went on to conclude that “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 hours laws, which are remedial in nature and must be liberally construed in favor of affording workers protection.” As a result, the court concluded, “the term ‘hiring entity’ was selected for its neutral connotations and not as an unannounced prerequisite to the ABC test.”  

In reaching its decision, the Mejia court also relied on the Court of Appeal’s decision in People v. Uber Technologies, Inc. (2020) 56 Cal.App.5th 266, 287, which considered and reached the same conclusion on this issue, with the court there reasoning that “[t]he Supreme Court [in Dynamex] went to great lengths to explain why the ABC test … derives from the suffer or permit to work definition embedded in the wage orders it was construing.” Further, the Mejia court found compelling the California Supreme Court’s decision in Vazquez v. Jan-Pro Franchising International, Inc. (2021) 10 Cal.5th 944, 948, where the high court emphasized that Dynamex was an authoritative judicial interpretation of the “suffer or permit to work” language. Importantly, neither of these cases held that workers must satisfy an initial threshold hiring test before application of the ABC test when analyzing independent contractor status.  

Takeaways for Employers

Overall, this decision is a good reminder that the employer will continue to bear the burden to satisfy the ABC test from the outset when proving a worker’s independent contractor status. There is no initial threshold test that needs to be met by the worker before the employer is expected to establish the ABC test in Dynamex. Although not discussed in this alert, employers should also be aware that the Dynamex decision does not necessarily apply to all employees. AB5, which codified Dynamex, has carved out exemptions for certain industries and occupations that may follow a different set of standards to determine independent contractor status. Employers that utilize a workforce that is not fully classified as employees are strongly encouraged to consult counsel to determine potential exposure and to mitigate risks related to misclassification claims.