In 2004, Dynamex was a same-day delivery service. (It’s since been acquired and rebranded TForce Final Mile.) That was the year it “converted” all its drivers to independent contractors, to use the verb chosen by the California Supreme Court.
There are many reasons why a company would prefer to classify its workers as independent contractors. A company generally isn’t liable for the negligence of independent contractors, such as crashes caused by truck drivers rushing to meet a deadline. In addition, Dynamex freed itself from “the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing workers’ compensation insurance, and…. complying with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees,” as the court said. Kind of makes you wonder why any company bothers with employees, doesn’t it?
It was easy enough for Dynamex to say its drivers were now independent contractors. It simply changed the wording of its contracts and altered its payroll practices, after which the newly “independent” drivers continued to take orders from Dynamex while wearing Dynamex uniforms, providing services to Dynamex customers at prices set by Dynamex.
But deciding the legal validity of the conversion wasn’t nearly so easy. No fewer than 35 lawyers entered their appearances in the California Supreme Court case. They were wrestling with an issue that has bedeviled American courts for many decades. As long ago as 1944, in a case involving newsboys, the United States Supreme Court declared: “Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent, entrepreneurial dealing.”
The issue first arose in the context of personal injury lawsuits. Employers are responsible for wrongs committed by employees in the course of their employment, but not for the wrongs of independent contractors. So how do you tell the difference? For purposes of tort liability, the rule developed that an employment relationship exists, and liability follows, if the company has “the right to control the manner in which the details of the work are to be done.” Those are the words of a current New Mexico jury instruction.
The “right to control” standard makes sense for torts. Right to control brings responsibility for controlling. But control over details isn’t really pertinent to laws governing child labor, overtime, minimum wage, and so on. And so, over the years, judges began considering various other factors, giving more weight to one or another as seemed appropriate to a given case. That’s what our courts do here in New Mexico.
Multi-factor balancing tests (as they’re known in the biz) are great for litigators, who can almost always find something to work with, and for judges, who can justify whatever result feels right. But they’re deadly for business planning. It’s not easy to predict the outcome of any balancing test. Flexibility is great in its place, but not when it results in a legal standard by which “no one can know where he stands until litigation has been completed,” as federal Judge Frank Easterbrook puts it.
The California Supreme Court’s ruling in the Dynamex case was intended to end that uncertainty for business and not just to protect misclassified employees. The court adopted what it called the ABC test for determining who’s an employee. It’s called that because it includes three parts. Unless the hiring entity can satisfy all three, the worker is an employee.
Part A is the old “right to control” standard. Part B asks if the worker’s tasks are central to the company’s business. For instance, a delivery driver for a furniture store might genuinely be an independent contractor. Part C asks if the worker is actually engaged in an independent trade or business, in the manner of a plumbing contractor.
The employment statute recently enacted by the California legislature garnered many headlines, but it was mostly just a codification of the Dynamex decision. California isn’t even a pioneer: the ABC test was first formulated in other states. But they aren’t the home of Uber.
I mentioned that the issue is an old one. But so is Uber’s business model, which is why we have laws governing conditions of employment in the first place. Uber’s top five executives received $143 million in compensation last year, according to Business Insider. Meanwhile, the Economic Policy Institute calculated that the average Uber driver cleared $9.21 per hour, without traditional benefits. All those seamstresses doing piecework in the New York tenements of the 1890s were part of the gig economy, too.
Joel Jacobsen is an author who recently retired from a 29-year legal career. If there are topics you would like to see covered in future columns, please write him at email@example.com.