Some of the black-owned beauty/barber professionals in our network reached out with concerns and confusion over the effect of a fairly recent California Supreme Court decision called Dynamex Operations West, Inc. v. Superior Court. They want to know how it will affect themselves and their staff, many of whom are single moms currently classified as 1099 workers.
Dynamex Operations West, Inc. v. Superior Court of Los Angeles was brought by two delivery drivers against same-day delivery company Dynamex. In 2004, Dynamex started classifying delivery drivers as independent contractors rather than employees. In the suit, the plaintiffs contested that Dynamex was misclassifying their drivers, therefore violating the provisions of IWC wage order No. 9, the applicable state wage order governing the transportation industry.
In its April 30, 2018 ruling, the California Supreme Court revised its previous interpretation of what constitutes an independent contractor, which was done using the Borello test. This test, used since 1989, focused mainly on whether a hiring entity had a “right to control” the manner in which the work was performed by the worker. Individual circumstances of each case were taken into consideration when arriving at a classification.
In Dynamex v. Superior Court, the court adopted a new test, known as the “ABC test,” which embraces a standard that presumes workers are employees unless the hiring entity proves all three of the following:
(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the 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.
Christopher posted a nice explainer video of the Dynamex case.
What does the case mean?
Who better to turn to than the lawyers in our membership? Jill Thompson of Public Counsel wrote:
I think we can safely say that under Dynamex, many more workers are going to be deemed employees rather than independent contractors, at least for purposes of wage and hour laws.
However I don’t know yet what that’s going to look like in the hair salon business. Many hair stylists do control the terms of their business, i.e. hours, clients, services, prices, etc. and simply rent a space from the salon owner. That would probably meet the “A” part of the ABC test. However, I can’t really see a scenario where they would meet the “B” part of the test (unless, for example, they are working for a hotel or spa or something like that and just arrange to independently provide services to clients on the premises). Also, if they only work at one place and don’t also work outside the shop for other salons or customers (or at least have the option to do so), they probably won’t meet the C test either. The result is that some businesses may have to restructure their relationships with workers and start regulating hours, paying minimum wage, etc. The impact on withholding (taxes, UI, SDI, etc) has not yet been determined to my knowledge.
Though the decision only applied to wage claims that govern the transportation industry, the new rule could be interpreted more broadly and apply to the general classification of workers. If this is the case, many micro-business owners that rely heavily on contractor work, such as hair salons that rent space and equipment to independent stylists, could see their business model significantly impacted.
The Labor Commission has yet to issue new guidance for inspectors based on the recent decision.
What can business owners do now?
It’s important for business owners, independent workers, and the organizations that serve them to start looking at options that allow them to stay in business while complying with the new rule. One alternative could be to restructure as an LLC with workers as bona fide partners, either through worker cooperatives or other arrangements where the original business owner retains some level of management control and profit sharing. We recommend that both business owners and workers seek legal counsel to review their business relationships under the new “ABC test” and determine if reclassification is needed. You can also consult the following resources:
- Lawyers’ Committee for Civil Rights of the San Francisco Bay Area
- Sustainable Economies Law Center (cooperatives)