Employee or Independent Contractor?

AB 5: The Great California Employment Experiment—A Littler Workplace Policy Institute Report 

California

From JDSupra, Sophia Behnia, Jacqueline Kalk, Michael Lotito, Alexander MacDonald, Tammy McCutchen, and Stephen Melnick prepared a thorough report that has everything you want to know about Dynamex, the ABC test and AB5, the bill in the California legislature that adopts the ABC test to classify workers as employees or independent contractors. They provide an excellent overview of the bill, its evolution, a review of the Dynamex decision, and analysis of the ABC test. They also discuss the the bill’s challenges, ramifications and possible amendments. One part of the ABC test that is frequently discussed is prong B — whether the services provided by the worker are outside the usual course of the hiring entity’s business. On the B prong, they write:

2.   The “B” prong is unclear because it is difficult to define a “business”

The crux of the problem with the ABC test’s B prong is that it assumes everyone knows and can define the business. The Dynamex court described the B prong as addressing “workers whose roles are most clearly comparable to those of employees …”

For purposes of tax law, whether a trade or business exists usually arises in the context of whether certain expenses are deductible as ordinary and necessary business expenses under IRC section 162, as opposed to personal expenses (or unnecessary and extraordinary expenses) for which no deduction is allowed. The Social Security Act, which created the federal-state unemployment system and imposes upon the states a number of requirements to receive federal funding, states “the term ‘business’ means a trade or business (or a part thereof).” The term “business” is not defined by the ABC test or in the Dynamex opinion. Defining a term with the term itself is not very useful.

The ordinary meanings of the term “business” are quite varied.48

These different definitions are also not helpful, insofar as they do not tell us what the term means for wage and hour or unemployment purposes.  Cases from Massachusetts49 have explained that in looking at how to define the usual business, how the firm defines its services may be important. For example, in Athol Daily News v. Board of Review of the Division of Employment & Training, the court found:

In light of the fact that the News itself defines its business as “publishing and distributing” a daily newspaper, we agree that the carriers’ services are performed in “the usual course of [the News’s] business.” See Mattatuck Museum-Mattatuck Historical Soc’y v. Administrator, Unemployment Compensation Act, 238 Conn. 273, 280 (1996) (art instructor services performed “on a regular or continuous basis” within art museum); Bigfoot’s, Inc. v. Board of Review of the Indus. Comm’n of Utah, 710 P.2d 180, 181 (Utah 1985) (musicians performed “usual and customary” activity of beer bar); Yurs v. Director of Labor, 94 Ill. App. 2d 96, 104 (1968) (organist played music as “usual part of” funeral home’s business).

Not all courts have agreed with this approach. For example, in Q.D.-A., Inc. v. Indiana Department of Workforce Development, Indiana’s Supreme Court, recognizing that there is no definition of business in its own ABC statute, began its analysis of the B prong by borrowing a definition from other courts:

With no Indiana case clearly defining “course of business,” we adopt the definition applied by two of our sister states under their respective ABC Tests: “if an enterprise undertakes an activity, not as an isolated instance but as a regular or continuous practice, the activity will constitute part of the enterprise’s usual course of business irrespective of its substantiality in relation to the other activities engaged in by the enterprise.” Appeal of Niadni, Inc., 93 A.3d 728, 732 (N.H. 2014) (alterations removed) (quoting Mattatuck Museum v. Unemployment Comp., 679 A.2d 347, 351 (Conn. 1996)). In other words, if a company regularly or continually performs an activity, no matter the scale, it is part of the company’s usual course of business. And if a company regularly or continually performs activities showing it is “engaged in various separate and independent kinds of businesses or occupations,” it may have more than one course of business. Scott v. Rhoads, 114 Ind. App. 150, 150, 51 N.E.2d 89, 91 (1943).

The facts of the case are similar to many cases alleging worker misclassification. Q.D.-A. is a business that connects drivers with customers who need too-large-to-tow vehicles driven to them. Q.D.-A. contracted with a Driver to pair him with customers needing this driving service. The parties entered into a written contract that explicitly called the Driver an independent contractor and allowed him to choose his own hours and the routes he believed were safest and most direct, contract with Q.D.-A.’s competitors, decline any work offered by Q.D.-A., negotiate his pay for each trip, and hire other drivers to complete his deliveries if they were qualified under federal regulations.

Turning to the case at hand, the court noted that the parties agreed that the worker performed drive-away services, but disagreed as to what constituted the company’s “business.” The Department of Workforce Development argued that how a company markets itself should play an important role in defining its business. The court rejected this argument, noting that “marketing plays little, if any, direct role in analyzing the activities Q.D.-A. performs on a regular or continual basis. To be sure, advertising can reflect services a company offers to its customers. But we cannot uncritically rely on that advertising to fully reflect the activities a company regularly or continually performs.” The court further added:

Instead, according to the panel’s “common-sense standpoint,” these customers would call the company to transport the RVs without caring how the company accomplished the task. [Citation omitted.] In other words, the panel supported its conclusion with speculative customer belief and facts not relevant to activities the company regularly or continually performed. By leaving the company’s activities unexamined, [its] reasoning did not answer the statutory question of whether its usual course of business included delivering RVs.

Ultimately what the Indiana Supreme Court did was reject what is far too common in worker classification cases—reaching a conclusion based on assumptions and “common sense” rather than a reasoned decision based on application of the law to the actual facts. But this raises the issue of whether the definition of the term “business” is clear, articulable and knowable, or, as is so often the case, based upon what the trier of fact thinks a business does, such that any “rule” can be objectively applied to facts.

In Curry v. Equilon Enterprises, LLC, a published opinion rendered only a few weeks after the California Supreme Court’s Dynamex opinion, the appellate court addressed the ABC test in the context of a joint employer case. The matter involved whether an employee of a company that leased service stations from Shell was also an employee of Shell under a joint employment theory. Applying the Dynamex’s court analysis of the ABC test, the Curry court stated:

The “B” factor requires an examination of whether “the worker performs work that is outside the usual course of the hiring entity’s business.” (See Dynamexsupra, 2018 Cal. LEXIS 3162, *90.) For example, if a bakery hires cake decorators to work on a regular basis, then those cake decorators are likely working within the bakery’s “usual business operation,” and thus would be employees. Whereas an electrician hired to work at a bakery would likely be viewed as not working within the bakery’s usual course of business and therefore would not be viewed as an employee. (Id. at pp. *92–93.)

We concluded ante that Curry was engaged in the distinct occupation of an ARS station manager. We also concluded ante that Curry’s “management of two gas stations was part of ARS’s regular business because ARS’s business involved operating gas stations.” We explained that “Shell was not in the business of operating fueling stations—it was in the business of owning real estate and fuel.” Thus, there is not a triable issue of fact as to the “B” factor because managing a fuel station was not the type of business in which Shell was engaged.50

However, in Vazquez v. Jan-Pro Franchising International, the Ninth Circuit, which held that Dynamex applied retroactively, states that “the ABC test is conjunctive, so a finding of any prong against the hiring entity directs a finding of an employer-employee relationship.51 Prong B may be the most susceptible to summary judgment on the record already developed.” The opinion then notes, “courts have framed the Prong B inquiry in several ways. They have considered whether the work of the employee is necessary to or merely incidental to that of the hiring entity, whether the work of the employee is continuously performed for the hiring entity, and what business the hiring entity proclaims to be in.” The Vazquez court curiously also cites the Mattatuck Museum case.

In discussing these approaches, Vazquez focuses in part on economics. Citing an Illinois case,52 it found that carpet measuring was necessary to a carpet retailer, and so the workers were in the same business as the carpet retailer, but a person who performed “highly specialized restoration work” was not a “key component” to a general contractor, and thus in a different business. Further, it distinguished cab leases, where the lessor’s revenue did not vary based on the services of the drivers, from the situation where the drivers paid a percentage of their earnings to a limousine company. Vazquez, citing the Athol Daily News case, also looked at how the business holds itself out to the public.

Turning back to the Dynamex opinion, what is the “usual course of business” of a retail store? The court does not say, and it is not defined anywhere in the opinion. If we do not know what that business is, how can anyone know whether a service is or is not in the usual course of such business? The answer, presumably, is we just assume we know or get to guess based on the description “retail store” that its business is “selling” some kind of tangible goods. The court’s analysis now suggests that the “B” prong is based on assuming someone knows what a business does.

What if the retail store is part of a large chain that has its own maintenance staff that includes plumbers and electricians? Are maintenance and repairs then part of the usual business of the retail store? If so, if it still hires an outside plumber or electrician, does that create an employment relationship under the “B” prong? What if that outside plumber has his own truck, tools, advertising, and other clients? Is he then in business for himself as a “traditional independent contractor” under the “C” prong, particularly if the retail store does not “control” him under the “A” prong? What if the electrician is a retired electrician that happens to be a friend of the store manager, and offers to fix whatever electrical issue exists for a small fee? Is he an employee because the “C” prong is not met or because the “B” prong is not met, or both? These kind of practical questions have no answer in the court’s opinion.

In summary, what is telling from the court’s bare and incomplete examples is not what it says, but everything the court chooses to omit that could make the question difficult to answer. By failing to address any complex, modern, real-world examples, the court leaves unanswered several critical questions and provides little meaningful direction for courts, agencies, businesses or workers.53

Read the full report at  AB 5: The Great California Employment Experiment—A Littler Workplace Policy Institute Report | Littler – JDSupra

Back to Top