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The California Supreme Court ruled that companies that want to classify their workers as independent contractors must prove the workers are running their own businesses. The ruling could help thousands of drivers for ride-hailing companies like Uber and Lyft, as well as other gig economy workers. The case is Dynamex Operations West vs. Superior Court,.

Dynamex is a nationwide same-day courier and delivery service that operates a number of business centers in California. Dynamex offers on-demand, same-day pickup and delivery services to the public generally and also has a number of large business customers – including Office Depot and Home Depot.

Prior to 2004, Dynamex classified its California drivers as employees and compensated them pursuant to this state’s wage and hour laws. In 2004, Dynamex converted all of its drivers to independent contractors after management concluded that such a conversion would generate economic savings for the company.

Under the current policy, all drivers are treated as independent contractors and are required to provide their own vehicles and pay for all of their transportation expenses, including fuel, tolls, vehicle maintenance, and vehicle liability insurance, as well as all taxes and workers’ compensation insurance.

Two individual delivery drivers, suing on their own behalf and on behalf of a class of allegedly similarly situated drivers, filed a complaint against Dynamex Operations West, Inc. alleging that Dynamex had misclassified its delivery drivers as independent contractors rather than employees.

After an earlier round of litigation in which the trial court’s initial order denying class certification was reversed by the Court of Appeal (Lee v. Dynamex, Inc. (2008) 166 Cal.App.4th 1325), the trial court ultimately certified a class action.

In response to the trial court’s later denial of Dynamex’s subsequent motion to decertify the class, Dynamex filed the current writ proceeding in the Court of Appeal which rejected its arguments.

Dynamex filed a petition for review in the Supreme Court, challenging only the Court of Appeal’s conclusion that the wage order definitions of “employ” and “employer” discussed in Martinez v. Combs (2010) 49 Cal.4th 35, 64, are applicable to the question whether a worker is properly considered an employee or an independent contractor for purposes of the obligations imposed by an applicable wage order.

The Supreme Court affirmed the Court of Appeal and concluded it is appropriate to look to a standard, commonly referred to as the “ABC” test, And it agreed that the standard for determining the employee or independent contractor question set forth in this court’s decision in Borello, (48 Cal.3d 341) is not the sole applicable standard.

Under this test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such 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 for the hiring entity.

The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions.

The ruling did not address other issues, such as payment of work expenses, workers’ compensation and unemployment benefits, which are covered by separate laws.