As many readers undoubtedly are aware, California’s governor recently signed into law legislation that would re-classify app-based workers as “employees” rather than as “independent contractors. As discussed below in a guest post written by John M. Orr and Jully Y. Rojas, these recent changes in California law could have national significance. The changes could have significant Employment Practices Liability Insurance implications as well. John is a Director in Willis Towers Watson’s FINEX (Financial, Executive & Professional Risk) division. Jully is a member of FINEX’s Claims & Legal Group. Both are resident in the firm’s San Francisco office. The authors wish to thank Talene Carter, Willis Towers Watson’s Employment Practices Liability product leader, for her insights and guidance. A version of this article previously appeared on the Willis Towers Watson site. I would like to thank John and Jully for their willingness to allow me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors in topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is John and Jully’s article.
The emerging nature of employment in todays “gig” economy has given rise to changes in the laws of the country’s most populous state. From the 2018 California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court (Dynamex), to the state legislature’s recent codification of Dynamex in Assembly Bill 5 (AB 5), many companies may be compelled to re-classify certain “independent contractors” as “employees.” Changes in worker classification have the potential to impact employers and employees relative to wages, unemployment benefits, employment practices liability insurance and beyond. Because of California’s well-earned reputation for being a first to enact transformative legislation, the issue has national significance.
Background — The gig economy and growth in the use of independent workers
The gig economy in 2019 is more expansive than ever, with the number of independent workers in the U.S. having increased by more than 19% in a 10-year period.[i]The gig economy, generally understood to include individuals paid by the “gig” (musicians, freelance journalists, ride share and truck drivers, or temporary workers), has grown, in part, due to greater accessibility to jobs through social networks and digital platforms that connect consumers seeking specific services to individuals who are willing to provide such services.
With the expansion of the gig economy, independent workers have enjoyed access to new sources of revenue and new work opportunities. Employers who rely on independent workers also have benefitted from technology platforms that put them in touch with candidates. Notwithstanding these benefits, and as discussed below, a company’s classification of gig workers as independent “non-employees” may not hold up under state or federal law. In this regard, companies may be compelled to treat certain independent contractors as employees, giving rise to numerous corporate, employment and related financial issues.
For many of these companies, whether a worker is an employee or independent contractor also impacts how they view their employment practices liability insurance program. Specifically, companies must question how many employees they actually have, in what locations they reside, and how they should be evaluating the adequacy of limits they purchase.
Dynamex Operations West, Inc. v. Superior Court
In April 2018, the California Supreme Court issued a landmark decision entitled Dynamex Operations West, Inc. v. Superior Court. In Dynamex, the state’s highest court adopted a test commonly referred to as the “ABC” test, which was a departure from the more traditional “right to control” test. Unless a business can satisfy the ABC test, an individual designated as a contractor by a company would be deemed, instead, to be an employee. For a business in the gig economy, this could result in the classification of hundreds, if not thousands, of gig workers as employees, and with it, increased financial responsibilities for the business.
Under the ABC test, a worker is presumed to be an employee unless the hiring business can establish three factors for such worker to be properly classified as an independent contractor:
A – The worker is free from the control and direction of the hirer in connection with the work, both under any contract for the performance of such and in fact.
B – The worker performs work that is outside the usual course of the hiring entity’s business.
C – 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 underlying case in Dynamex concerned a class action by delivery drivers alleging their employer, a trucking company, had misclassified them as independent contractors. The trucking company maintained that the classification of these workers as independent contractors was based on a contractual arrangement that deemed all drivers as independent contractors rather than employees. The drivers, however, argued the company’s misclassification led to numerous violations of California wage orders and the state’s Labor Code.
The court analyzed the classification issue in the context of wage orders, which impose obligations relating to wages, maximum hours and basic working conditions of California employees. Recognizing the history and purpose of the wage orders to provide protection to all workers who would ordinarily be viewed as working in the hiring business, the court held that the proper standard to determine if a worker is properly considered an independent contractor is the ABC test articulated above.
Notably, Dynamex represents a departure from prior state case law which sets forth a multi-factor standard to distinguish employees from independent contractors. (S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 ) Under Borello, a principal factor was the “right to control” — whether a hiring business had the right to control a worker’s manner and means of accomplishing the services provided. By replacing it with the new ABC test, Dynamex moved away from a standard that emphasized “control” and replaced it with a broader standard requiring, among other factors, to show that a worker performs work outside the usual course of the hiring business. Thus, when determining whether a worker is an employee or an independent contractor for purposes of obligations imposed by a wage order, the ABC test is the new legal standard that applies in California.
California Assembly Bill 5 — Dynamex codified
On the heels of Dynamex, in September 2019, the California legislature passed AB 5, scheduled to take effect January 1, 2020. The new law largely codifies the ABC test adopted in Dynamex, meaning the test would serve as the standard in California for determining employment status. While certain industries or professions are exempt — such as doctors, architects, engineers and independent hair stylists — industries, such as the ride share industry, are not.
As of this writing, debate remains on the extent of impact the law will have on these companies. In this regard, arguments have been made challenging whether the work that the independent contractors do falls within the “usual course” of the companies’ business.
Stated differently, Dynamex and AB 5 may have established standards for the classification of workers in the state, but whether those standards will or will not apply to any given company may need to be resolved in potentially time-consuming and costly litigation.
In addition, many affected companies are backing efforts to put the issue before the California voters, pledging millions of dollars in support of a ballot initiative that could have the effect of undoing AB 5.
How Dynamex has played outside California
Although Dynamex and AB 5 represent the standard to determine the independent contractor vs. employee question in California, the standard is not followed in all jurisdictions. For example, the Department of Labor (DOL) opined recently on whether gig workers in a “virtual marketplace company” are properly classified as employees or independent contractors under the Fair Labor Standards Act (FLSA). Unlike the ABC test in Dynamex, the DOL’s focus is on whether a worker is “economically dependent” on a potential employer.
In determining such economic dependence, the DOL applies a six-factor test, including the nature and degree of the potential employer’s control. In this case, the hiring business provided an online and/or smartphone-based referral service connecting workers to end-market consumers to provide a wide variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting and household services. According to agreements in place, only the workers would provide services to consumers in the virtual marketplace, and the gig workers (or service providers) were classified in the agreements as independent contractors.
Applying the facts to the six-factor test, the DOL concluded that the gig workers were independent contractors, not employees, as the facts demonstrated economic independence rather than economic dependence, in the working relationship between the hiring entity and its service providers.
Similarly, in an opinion letter of its own, the National Labor Relations Board (NLRB), through the Office of General Counsel, determined that certain drivers of ride-sharing company are independent contractors, not employees, for purposes of the National Labor Relations Act. In making that determination, the NLRB applied a common-law agency test by examining the factors through “the prism of entrepreneurial opportunity” set forth in prior NLRB precedent.
Weighing in favor of these drivers as independent contractors was the fact that they have “virtually complete control of their cars, work schedules and log-in locations, together with their freedom to work for competitors.” According to the NLRB, these factors provided them with significant entrepreneurial opportunity given that, at any moment, “the drivers could decide how best to serve their economic objectives: by fulfilling ride requests through the App, working for a competing ride-share service, or pursuing a different venture altogether.”
These cases demonstrate that there is no one test or uniform standard that answers the question of whether workers are properly classified as independent contractors or employees. When viewed through the lens of Dynamex and AB 5, it appears that the status of gig workers as independent contractors could be more difficult to establish under the ABC test. Companies that are based on a gig platform whose core services are to provide connections between contractors and customers would have to show that services provided by a gig worker are outside of the company’s core business — a fact that could prove difficult for companies to establish. When viewed through the lens of other standards or through the prism of “entrepreneurial opportunity,” however, the outcome could very well be different and favor an independent contractor status.
Impact on employment practices liability insurance
When companies purchase employment practices liability (EPL) insurance, a threshold area of underwriter inquiry is headcount. How many employees does the company have overall? How has the number of employees changed year over year? How is headcount broken down by location? Pre-Dynamex, answers to these and similar questions were quantifiable in nature. Post-Dynamex and AB 5, the answers may be complicated by broader legal scrutiny. The cost of EPL coverage potentially lies in the balance. Another factor for companies to consider is how changes in employee count should affect the amount of insurance the company purchases. If the Dynamex decision and AB 5 force certain companies to acknowledge a headcount increase, how does that affect decisions to increase limits of liability and, if so, by how much? Seeking guidance from their insurance broker will be essential to addressing these questions.
Finally, affected companies should seek the guidance of their brokers on specific EPL policy wording that may be negotiated to mitigate coverage uncertainties. Although traditional EPL policies are not designed to cover employee classification and related wage claims, companies may wish to explore customized wording to ensure that the extent of new risk emerging from Dynamex and AB 5 is addressed as they intend.
Just as the gig economy is evolving, so too are the laws with respect to classification of workers. The import of Dynamex and AB 5 in terms of scope and effect remains to be seen. As a result, whether workers are classified as independent contractors or employees should be an often-asked question — the answer today may not be the same down the road.
In light of potentially conflicting authorities, the classification and treatment of workers will give rise to numerous issues ranging from how classification should be handled, whether there are contractual or other legal workarounds, to how EPL insurance may be impacted. Ultimately, companies should confer with employment and corporate counsel, as well as their insurance brokers.
[i] Istrate, Emilia and Harris, “The Future of Work: The Rise of the Gig Economy,” National Association of Counties, November 2017, https://www.naco.org/featured-resources/future-work-rise-gig-economy