ASK THE EDD LAWYER – THE CALIFORNIA SUPREME COURT’S DYNAMEX DECISION PART 2 – “JUST THE FACTS”
By Robert S. Schriebman
At the risk of dating myself, I remember the black and white television show “Dragnet,” starring Jack Webb and Harry Morgan. They played the role of Los Angeles Police Detectives. Whenever they interviewed a witness who went off on a tangent they said, “Just the facts, sir.” This article will set forth the operative facts of the recent Dynamex case.
At the end of April 2018 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 also been thrown out. 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).
Just The Facts
The facts in the Dynamex case are set forth on pages 8 through 10 and 79 through 81.
Dynamex Operations West, Inc. is a nation wide same-day delivery service that operates in several locations throughout California. It hires hundreds of drivers. These drivers, for the most part, are owner-operators of their delivery vehicles. This means that they bear all of the expenses of ownership and operation including license, registration, insurance, repairs and maintenance, as well as the hiring of their additional drivers. Dynamex, in my opinion, made its fatal error when, in 2004, it reclassified its drivers from employees to independent contractors, but did not really change its basic operations. Dynamex’s primary objective is to assign the delivery of packages, etc, to individual drivers with the clear understanding that the packages must be delivered the same day. Once packages are delivered, and the drivers report back to Dynamex, they are free to do whatever they want including driving for other clients.
Drivers are free to set their own schedules. They do not have to take any assignment they do not wish to handle. They are free to hire their own sub-drivers to complete the delivery schedules. With this said, many drivers worked solely for Dynamex. Dynamex also required all drivers to wear a shirt that said “Dynamex,” and to carry ID badges denoting their connection with Dynamex. They were also required to have Dynamex decals on their trucks. Drivers were also required to purchase a Nextel cell phone in order to maintain contact with Dynamex. Dynamex notified drivers where to pick up packages and where to deliver them. Dynamex also tracked packages on its system and required drivers to utilize its tracking system.
Dynamex had written contracts with drivers that set the rates of compensation. Drivers are paid either a flat rate or an amount based on a percentage of fees received by Dynamex. Drivers must complete all deliveries on the same day. Per terms of the contract, Dynamex reserved the right to control the number and nature of deliveries that it offered to drivers. All drivers could be discharged at will.
Dynamex maintained this same business model prior to 2004 when it treated all drivers as W2 wage earners. The Court made it a point to note that the business model did not change after drivers were made independent contractors.
The Impact of the Written Contract between Dynamex and Drivers
The Court did not provide a copy of the contract between Dynamex and its drivers. However, the Court did note that the contract did have the usual language where the driver acknowledges that he/she is an independent contractor and is thus responsible for the payment of payroll taxes, state worker’s compensation, and other state and federal obligations. The contract provided that all drivers can be discharged at will and that Dynamex reserves the right to control the number and nature of deliveries that it offers to on-demand drivers.
One of the arguments that is traditionally advanced to establish an independent contractor relationship is that the language set forth in the contract cements the intention of the parties. Here the language was clear that an independent contractor relationship was created. The Court, however, stated that the intention of the parties is of little importance. The Court said, “Finally, with regard to the ‘parties’ belief regarding the nature of relationship’ factor, the court noted that ‘this factor is given less weight by courts’ and stated ‘[a]ll the drivers signed agreements stating that they were independent contractors. The drivers’ belief could reasonably be demonstrated through this classwide agreement.”
The Impact of the Borello Decision and the Industrial Welfare Commission
In 1989 the California Supreme Court decided in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello). This case established a multi-factor test to determine whether or not an employer engaging an independent contractor has retained too much control over the relationship. If so, the contractor is re-classified as an employee. We will examine these factors and how they impacted the Court’s Dynamex decision in our next article. It is still not clear in my mind whether the Supreme Court threw Borello under the bus.
The ultimate decision of the California Supreme Court was to uphold a Wage Order issued by the Industrial Welfare Commission (IWC) back in 1916 that established a test under the “suffer or permit to work” standard. In footnote 3 of t he Decision, at page 3, the Court set forth the impact of an IWC Wage Order as follows: “In California, wage orders are constitutionally-authorized, quasi-legislative regulations that have the force of law.(Cal.Const., art.XIV, § 1; Lab.Code, §§ 1173, 1178, 1178.5, 1182, 1185; Industrial Welfare Com. v. Superior Court (1980) 27 Cal.3d 690, 700-703 (Industrial Wlf.Com.).)”
In My Opinion – Why Did Dynamex Lose?
The primary objective of the California Supreme Court was to apply a new-old standard in determining worker classification, not for purposes of taxation, but for purposes of California wage orders which impose obligations relating to worker conditions, such as minimum wage and hours, as well as minimum working conditions. It did not help Dynamex that it changed the classification of its employees in 2004 to independent contractors without instituting new and different requirements. The business model remained the same. Drivers were required to purchase a Nextel cell phone and to wear Dynamex’s shirts, carry Dynamex’s ID badges, and place Dynamex’s decals on their vehicles.
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. The new test will take a long and hard look at whether the worker is really in business under traditional standards. I get the feeling that the new test will continue to rely on traditional standards of control. There may be nothing new under the sun after all.
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 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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