Sometimes you’re the disruptor. Sometimes you’re the disrupted.

Mark Webb

In an 85-page missive, the California Supreme Court, in Dynamex Operations West vs. Superior Court, unanimously left no doubt that for wage and hour purposes fewer individuals will be independent contractors. Commentators nationwide were quick to opine that this was a major blow to the gig economy.

The new test for employment status, the “ABC” test, was set forth by the court in its April 30 decision. Basically, the test uses three criteria. Per the court:

“Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (A) 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 such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that 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.”

The second criterion, “B,” that the worker performs work that is outside the usual course of the hiring entity’s business, will likely prove to be the most disruptive. While each case depends on the facts to a degree, establishing the hiring entity’s business is not a nuanced inquiry.

The burden of proof is on the employer to prove independent contractor status and that each of the ABC standards are met. Failure to prove any element means the worker is an employee.

The issue of employment status within the workers’ compensation system, however, was not before the court in Dynamex. Thus, the court’s prior holding in S.G. Borello & Sons Inc. v. Department of Industrial Relations remains the applicable standard for resolving whether someone is an employee for workers’ compensation purposes.

The court in Dynamex acknowledged that, “… because the Borello standard itself emphasizes the primacy of statutory purpose in resolving the employee or independent contractor question, when different statutory schemes have been enacted for different purposes, it is possible under Borello that a worker may properly be considered an employee with reference to one statute but not another.”

Under Borello, the Supreme Court stated that the determination of employment status cannot be decided absent consideration of the remedial statutory purpose of the workers’ compensation laws. The court then acknowledged as factors the primary test of right of necessary control over the manner and means used; whether the task is part of the principal’s regular business and discharge is terminable at will; whether the worker has a distinct business with equipment or employees that is subject to profit or loss; the skill and supervision required; mode of payment; bargaining position of the parties; and their intent (as summarized in Ware v. Workers’ Comp. Appeals Board).

The court in Borello also stated, citing previous authority, that “… the individual factors cannot be applied mechanically as separate tests; they are intertwined, and their weight depends often on particular combinations.”

It is difficult, however, to articulate the basic public policy rationale supporting the idea that there is a significantly different “statutory purpose” between enforcement of payment of wages to employees and providing those employees the benefits necessary to recover from an injury arising out of and in the course of employment. Certainly, the statutes address different issues.

That is not the same as saying that in one case (payment of wages) there should be a more expansive definition of “employee” than under the workers’ compensation laws. That is particularly the case when one considers that during the time an injured worker is recovering from the effects of his or her injury, temporary disability benefits are provided to make up for lost wages.

In other words, isn’t the statutory purpose behind making certain that employees receive the wages to which they are entitled just as pressing whether the issue is protecting someone from an unscrupulous hirer or whether it is to protect the employees from the loss of wages due to a workplace injury? Yet the court is making a distinction in Dynamex.

It would seem that public policy dictates the standard should be the same, regardless of what that standard is. It will be left either to the courts to extend the ABC test to workers’ compensation in the appropriate case or require the Legislature to intervene and harmonize these tests.

The Dynamex decision will lead to considerable litigation. Although it may be anticipated that a new wave of wage and hour claims are in the process of being prepared, it is premature to immediately assume that independent contractors have en masse been transformed into employees.

Any business using independent contractors, however, should already be assessing how its operations are affected by the ABC test and make the appropriate adjustments. One of the many unanswered questions for hirers is, what happens when an individual is considered an “employee” of multiple employers? 

For workers’ compensation insurers, there is the added confusion that an employee for wage and hour purposes may not be an employee for workers’ compensation purposes, meaning that the Dynamex payroll will be larger than the Borello payroll. There is also the possibility that a worker will not be sufficiently attuned to these legal maxims and file a workers’ compensation claim.

In such instances, the reconciliation of Dynamex and Borello will be, in the first instance, up to the Workers’ Compensation Appeals Board.

Today, there are far more questions than answers in the wake of the Dynamex decision. The speed with which these questions get answered will depend more on the Legislature than the courts. But, in today’s innovative economy the instructions are clear: Disrupt, adapt, repeat.

Mark Webb is owner of Proposition 23 Advisors, a consulting firm specializing in workers’ compensation best practices and governance, risk and compliance (GRC) programs for businesses. This blog post is reprinted by permission from InsuranceThoughtLeadership.com.