California Environmental Protection Agency’s Classification Requirements Require an Investment in Your Business

By: Mark Zisholtz
Edited by: Brandon Pavley

This commentary is in reference to content found on the California Environmental Protection Agency’s website. Please visit their site for more information.

Unfortunately, we commonly see misclassified independent contractors who fail to make an investment in their business, such as buying equipment or investing in software. Further, many companies want to engage independent contractors on a personal services contract. While prohibiting an IC from hiring workers to perform the services set forth in a contract does not automatically mean the IC is misclassified and is in fact a common practice, it is also true that the chances of misclassification drop rather significantly if the independent contractor is permitted to hire workers.

Such is the case with the California Environmental Protection Agency, which explicitly requires all independent contractors who want to be on the agency’s “approval list” to have the “proper equipment” (i.e., the IC must invest in its own business) and “qualified personnel to conduct the tests” (i.e., no prohibition against the IC from hiring workers to perform services under the contract).

Recent Developments in Independent Contractor Compliance under California Law

by Jason D’Cruz, Partner at Morris, Manning & Martin, LLP and

Shama Barday, Associate at Morris Manning & Martin, LLP

California is known for its hostility towards classifying workers as independent contractors.  Two recent developments reinforced this reputation and increase the risks for businesses engaging independent contractors.

Lee v. Dynamex Operations West, Inc.

In April 2005, two plaintiffs filed suit against Dynamex, a same day transportation and logistics company, on behalf of a class of delivery drivers who were converted from employees to independent contractors.  The plaintiffs alleged that they were improperly classified as independent contractors because despite the change in their titles, they were still performing the same work for Dynamex without any change in the amount of control exercised over them by Dynamex.  The plaintiffs argued that the class members were “employees” as defined in the California Industrial Welfare Commission (the “IWC”) Wage Order No. 9, applicable to the transportation industry.[1]  Wage Order No. 9 (and every other Wage Order issued by the IWC) defines “employ” as to “engage, suffer, or permit to work” and “employee” as “any person employed by an employer.”

Dynamex argued against class certification stating that the common law test based on S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989), and traditionally applied by California courts, should govern the inquiry.  The focus of the Borello test is on the “right to control” the manner and means by which an individual performs his or her duties.  The test also allows consideration of secondary factors, including, among others: whether the work performed is part of the regular business of the employer; whether the employer supplies the instrumentalities, tools, and place of work; whether special skills are required; the individual’s opportunity for profit or loss depending on his or her managerial skill; and whether payment is made based on time or by the job.  According to Dynamex, because the Borello test requires an individualized assessment of factors, class certification should have been denied. Continue reading