Welcome To “Interesting Times;” A Review of the New Dynamex and Epic Systems Cases

An ancient curse threatens: “May you live in interesting times.”  For California businesses, two recent high profile court decisions are making the current times very interesting indeed.

On April 30, 2018, the California Supreme Court issued a unanimous decision in Dynamex Operations West v. Superior Court. That decision dramatically changed the way that California Courts will analyze the issue of whether workers are “independent contractors” or “employees” under the California Wage Orders. A few weeks later, on May 21, 2018, the United States Supreme Court issued a badly split 5-4 decision in the case of Epic Systems Corp. v. Lewis. That decision holds that the Federal Arbitration Act (“FAA”) requires that arbitration agreements containing clauses mandating individual arbitration, and which do not permit “class” or “collective” arbitrations, must be enforced according to their terms, without regard to the National Labor Relations Act (“NLRA”), or any other federal statue. Although these decisions were issued by different courts on different issues, both will have a significant impact on California businesses.

The Dynamex case

In Dynamex, two delivery drivers brought a class action against Dynamex Operations West, a delivery company. The drivers claimed that Dynamex misclassified its drivers as “independent contractors” instead of designating them as “employees.”  The suit alleged that by doing so, Dynamex engaged in unfair competition and violated portions of California’s Labor Code. The primary issue before the California Supreme Court was to determine the proper definition of “independent contractor” to be used for analyzing claims arising under the California Wage Orders (which impose such obligations as minimum wages, overtime payment and meal and rest breaks). Dynamex argued that courts should apply the familiar multi-factor test for determining independent contractor/employee status based primarily on a decision issued nearly thirty years ago in S.G. Borello & Sons, Inc. v. Department of Industrial Relations.

The California Supreme Court disagreed, and instead established a new test that requires the hiring entity to establish that a worker is an independent contractor and not an employee covered by a Wage Order. To do this, the hiring entity must establish all three factors embodied in the so-called “ABC” test. The hiring entity now bears the burden of proving that:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both by contract and in fact; and
  2. The worker performs work that is “outside the usual course of the hiring entity’s business;” and
  3. 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.”

If a hiring entity fails to establish each of the three factors, the worker is deemed to be an employee and not an independent contractor. That “employee” then falls within the coverage of The California Wage Orders.

As a practical matter, the Dynamex decision creates at least as many problems as it solves. First, the application of “Factor B” will be problematic for many hiring entities, such as the numerous package delivery companies that rely on independent contractor drivers to make deliveries, or the numerous tech companies that historically have relied on independent contractor coders and technical consultants to develop their apps and other products. Under this new test, a court may find those contractors to be performing work that is within the usual course of the hiring entity’s business, and deem those workers to be “employees” covered by the California Wage Orders. As guidance as to who might qualify as an “independent contractor,” the Supreme Court suggested the example of a service company hiring a plumber to fix a leak; work that the Court described as being outside the scope of the hiring entity’s business. In short, any worker whose duties are not essentially unrelated to the hiring entity’s operations likely is now an “employee”  for purposes of the California Wage Orders.

The Dynamex decision throws several more curve balls. The case applies the new “ABC” test only to issues arising under the California Wage Orders, and leaves intact (for now) the “Borello“-type tests historically used by other agencies such as the EDD, Franchise Tax Board, and Worker’s Compensation Appeals Board. This suggests that a hiring entity might be required to meet different standards on different claims brought by the same worker. Several commentators predict, however, that these other agencies likely will gravitate toward the Dynamex standards, which also may be bad news for hiring entities.

Another curve ball from Dynamex is the Supreme Court’s failure to analyze the role played by independent contractors who provide services for several hiring entities, or who hire their own employees or independent contractors to provide services. Owing to the odd procedural posture of the case (pertaining to the certification of a class action), workers falling into these categories simply were not considered by the Supreme Court. In summary, Dynamex shakes up the playing field while leaving few rules to guide businesses.

The Epic Systems case

A few weeks later, the United States Supreme Court issued the decision of Epic Systems Corp. v. Lewis, which is far more favorable to employers and other hiring entities. In Epic Systems, the Supreme Court held that under the FAA, mandatory arbitration agreements may contain clauses requiring individual arbitration of disputes, and precluding “class” or “collective” arbitrations. In particular, the Supreme Court rejected that argument that such clauses violated the NLRA by impermissibly restricting employees’ rights to engage in “concerted action for mutual aid or protection.”

The Supreme Court resolved the issue by ruling that the FAA and NLRA “have long enjoyed separate spheres of influence and neither permits this Court to declare the parties’ agreements unlawful.”  The Supreme Court then stated that the FAA “instruct[s] federal courts to enforce arbitration agreements according to their terms” whereas “[t]he NLRA secures to employees rights to organize unions and bargain collectively, but it says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.”  The sharp dissent written by Justice Ginsberg, and Justice Gorsuch’s response to it, make for fascinating political/judicial reading.

Epic Systems is a win for employers and other hiring entities who chose to require mandatory arbitration agreements of their workers that preclude “class” or “collective” actions. The California Supreme Court already recognized this right in principle in the 2014 decision of Iskanian v. CLS Transportation. However, the Iskanian decision contains a significant carve out for Private Attorney General Act (PAGA) collective claims, on the theory that such claims (technically) are not between the worker and hiring entity, but between the State and the hiring entity. Although no PAGA issue was before the Supreme Court in Epic Systems, the language of the decision provides ammunition for the argument that the case’s holding should apply to the issue of individualized mandatory arbitration of PAGA claims as well. If so, California employers and hiring entities would be able to require mandatory individual arbitration of class claims and PAGA claims, making such lawsuits far less attractive to most employment plaintiff’s counsel.

What’s a business to do?

Undoubtedly, Dynamex is problematic for California businesses using independent contractors. For those with no appetite for risk, the answer is an easy one:  Make (virtually) everyone an employee. Of course, many companies either cannot or do not want to do this. Those companies must consult immediately with their employment and labor counsel to review all current independent contractor agreements to determine which workers pass muster and which do not, and whether the agreements should be revised in light of Dynamex to ensure compliance with the new “ABC” test.

Looking ahead, however, businesses would do well to reconsider whether to adopt mandatory arbitration agreements containing class action and collective action waivers for all workers, both employee and independent contractor. While such a waiver presently cannot be enforced against a PAGA collective action (due to Iskanian), the law in this area continues to be in flux. Courts soon may begin adopting the view stated in Epic Systems that the FAA is a “a congressional command requiring us to enforce, not override, the terms of the arbitration agreements before us.”  Such an agreement might soon permit the individualized arbitration of a post-Dynamex class or collective claim, including claims brought under PAGA.

Questions

If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Rex Berry
rberry@kmtg.com | 916.321.4570