By Robert S. Schriebman
At the end of April 2018 the California Supreme Court published the decision in Dynamex Operations West, Inc. v The Superior Court of Los Angeles County. This case has changed the playing field and given new definitions to "employer," "employee," and "employed." The EDD's famous 23 factor test may no longer be applicable and the leading Supreme Court case of Borello 48 Cal.3d 341 may have lost its impact. The new test is known as the "Suffer or Permit to Work" Standard. This new standard has three parts, any one of which, if met, will change the relationship of independent contractor to employer-employee. It is not a new test that the Supreme Court created on its own. Rather it has been around since 1916, but has been hidden in a wage order issued by the California Industrial Welfare Commission, but never been applied or interpreted by the courts until 2010 when it was discussed in another California Supreme Court Case known as Martinez v Combs 49 Cal.4th 35. Wage Order No. 14, Cal. Code /regs., tit. 8, § 11140, subd. 2(C).
In this Part 3 we will review the Borello decision. We will also look at two cases that were decided after Borello by the California Supreme Court, namely the Martinez case discussed above, as well as the case of Ayala v. Antelope Valley Newspapers, Inc., 59 Cal. 4th 522 (2014) (Ayala)
Is Borello dead? Not really. The California Supreme Court apparently did not choose to throw out Borello. The waters are unclear but after all the dust settled, it seems that Dynamex just added one more reality test to a long string of factors used to determine worker classification status.
Borello was about the nature and the extent of control that growers exercised over cucumber harvesters. Borello called for the application of a "statutory purpose" standard that considered the control of details of other potentially relevant factors identified in prior California cases in order to determine which classification (employee or independent contractor) best represented and implemented legislative attempt and objective of the statutory scheme at issue. (Dynamex page 33).
Borello became the seminal California decision on the subject. The case involved workers' compensation statutes. The cucumber harvesters worked pursuant to a written contract as "sharefarmers." In the contract they agreed to be treated as independent contractors. The grower argued that the workers were independent because they were free to manage their own labor, and the grower did not supervise the harvesting. The workers, as sharefarmers, also shared the profit and loss from the enterprise. They also agreed in writing that they were not W2 wage earners, but independent contractors.
In developing the well-known Borello six-part test, the Court looked at the "control-of-work-details." In addition to this factor, the Court (Borello 48 Cal.3d at pp. 354-355) listed 5 other factors as follows:
- The alleged employee's opportunity for profit or loss depending on his managerial skill;
- The alleged employee's investment in equipment or materials required for his task, or his employment of helpers;
- Whether the service rendered requires a special skill;
- The degree of permanence of the working relationship;
- Whether the service rendered is an integral part of the alleged employer's business.
(See Dynamex page 29 footnote 12)
The Decision in Borello was discussed thoroughly in both the Ayala and Martinez cases. Both of these decisions ultimately had an impact on the Court's ruling in Dynamex.
This case involved the worker status of newspaper carriers hired by the Antelope Valley Press to deliver newspapers. The carriers accused Antelope Valley of misclassifying them as independent contractors. You would think that the Supreme Court in Dynamex would review the lower Court's decision in Ayala, and compare it to the Borello's standards. The issue in Ayala involved the "right" to exercise control over newspaper carriers as opposed to how that right was actually exercised. The "right" test was governed by the 6-factor test in Borello.
However, the Court in Dynamex passed on a thorough analysis of the impact of Ayala on the delivery drivers involved in the Dynamex case. In Dynamex the Court had a different focus. The Court wanted to take up an issue not reached in Ayala, namely whether in an wage and hour class action alleging that the plaintiffs had been misclassified for purposes of a class action, the definitions of "employ" and "employer" as construed in the Martinez case should govern or whether the distinctions set forth in Borello should govern. The Court concluded that the definitions set forth in Martinez should be the controlling factor. This did not mean that Borello was thrown under the bus.
The Martinez case was decided four years before the Ayala decision. We will discuss the Martinez case in detail in Part 4. At this point, and in the interest of brevity, I will summarize the basic holding in Martinez.
The Martinez case reviewed the definitions "employer" and "employee" in light of a 1916 wage order issued by the Industrial Welfare Commission. The test is whether an employer "suffers or permits certain working conditions." Those are the magic words. In Dynamex the Supreme Court's primary focus came down to this: "Does the Suffer or Permit to Work Definition Apply to the Employee/Independent Contractor Distinction?" (Dynamex page 47)
The test has 3 primary factors:
- That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- That the worker performs work that is outside the usual course of the hiring entity's business;
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. (Dynamex page 64)
In Part 4 we will focus solely on the impact of the test set forth in Martinez on the Supreme Court's Dynamex decision.
Dynamex is not a tax case. It is essentially social welfare reform. It attempts to establish a 1916 wage order standard as the proper measurement to determine if a business relationship is truly one involving an independent contractor as opposed to an employee. The new test standard is "Suffer or Permit to Work." To implement this standard there is going to be an A- B- C- test that will treat most working relationships as employer-employee.
In reviewing the impact of Borello, Ayala, and Martinez, on Dynamex things can get very confusing and blurry. The Court did not throw out any of these decisions. Instead it created a sort of tapestry where everything is on the table and the Martinez decision will be a sort of filter that these other decisions must pass through in order to reach a proper worker classification conclusion.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.
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