SAN FRANCISCO, CA, May 9, 2018 -- In a landmark decision that will affect virtually every sector of the California economy, including the business of insurance, the California Supreme Court has dramatically shifted the line distinguishing employees from independent contractors.

In Dynamex v. Superior Court, filed April 30, the Court unanimously imposed new requirements that will almost certainly reduce, significantly, the number of independent contractors.

“Every insurance agency and brokerage in California needs to immediately understand that almost all producers may now have to be treated as employees, rather than independent contractors,” said IIABCal General Counsel Steve Young. 

“It doesn’t matter what current contracts may state, and it doesn’t even matter what the agency and producer may desire.  As a matter of law, the groundrules have been dramatically rewritten by this decision.”

Historically, administrative agencies and courts have developed a variety of rules for distinguishing employees from independent contractors.  While the exact scope of those rules varied from one context to the next, all were focused at their core on the extent to which an employer did or could “control” the actions of the worker; the greater the level of control, the more likely the worker was to be regarded as an employee.

In Dynamex, the Court effectively threw out the old rules and adopted an “ABC test.”  To qualify as an independent contractor, an employer must now prove all of the following:

A.   That the worker is free from the control and direction of the hirer in the performance of the work; and

B.   That the worker performs work 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 being performed for the hiring entity. 

The case was brought by workers against Dynamex Operations West, Inc. a nationwide package and document delivery company, alleging that Dynamex had misclassified its delivery drivers as independent contractors rather than employees. In resolving this issue in favor of the workers, the Court developed a new test for who is considered an employee for purposes of wage orders. 

In making its decision, the Court was quick to note that this new definition of who is an “employee” for wage and hour purposes is different from the definition of “employee” for workers’ compensation purposes (citing S. G. Borello & Sons, Inc. v. Department of Industrial Relations, a seminal 1989 case).

 However, most legal observers believe California courts and administrative agencies are highly likely to follow the new “ABC Test” enunciated in Dynamex in other contexts, not merely wage-and-hour claims—including for purposes of determining whether workers’ compensation must be provided.

“The Dynamex standard will undoubtedly be applied in all other contexts,” said John Baum, a partner in Hirschfeld Kraemer LLP, a prominent labor and employment law firm for employers, this week at the IIABCal Blue Ribbon Conference.

In the interim, though, there is the potential that an employer may have “employees” for wage and hour purposes who are not “employees” for workers’ compensation purposes.

“Some commentators have indicated that Dynamex doesn’t change the definition of employee for workers’ compensation purposes,” said Mark Webb, an authority on California workers’ compensation issues, “but it does pose issues for workers’ compensation insurance purposes. Specifically, the issue may arise during audits of payroll or if a claim is filed. At least potentially, the Court has created a situation where an employee who is being paid wages under the new ABC test as an employee, will not be an employee under the workers’ compensation tests set forth in Borello. The issue from an audit standpoint is whether payroll records will make that distinction.

“From a claims perspective, it is certainly plausible that someone who is getting paid wages by his employer will think that if they get hurt doing the work for which they are being paid, they may also have access to workers’ compensation benefits. Unless there is an extensive notification process for these individuals, it is possible that the employment issue will first be determined at the Workers’ Compensation Appeals Board,” Webb said.

Baum said, at the Blue Ribbon Conference, that requirements “B” and “C” in the ABC Test are the “game changers.”

Test A refers to “control,” as previous tests have also done.  But Test B requires the work being performed by an independent contractor to be outside the hiring entity’s business.  He cited, as a possible example, an insurance agency’s decision to hire an outside contractor to provide IT-related services.  That would be a service outside the scope of the insurance agency’s primary business.  And Test C would require the IT consultant to be in the business of providing IT-related services.

Young encouraged member agencies to consult with legal counsel to determine whether they should take immediate actions to reform any independent contractor producer agreements they were currently using.

Hirschfeld Kraemer is now reviewing the sample producer agreements it has drafted for IIABCal members.  A sample “independent contractor producer” agreement has been withdrawn from the Association website pending that review.  For a copy of the Supreme Court decision.