On April 30th, the California Supreme Court ruled in Dynamex Operations West v. Superior Court that a new, tougher legal standard will now apply to determining whether California workers are employees or independent contractors. Dynamex is a nationwide same-day courier service that, since 2004, has hired its drivers as independent contractors. The lawsuit began in 2005 when a former driver sued Dynamex, arguing that the company had been misclassifying its drivers as independent contracts when they should have been classified as employees and given the rights and protections that come with such status. After a series of lower court rulings and appeals, the case came before the California Supreme Court, which ruled—in a decidedly pro-worker fashion—that Dynamex was indeed misclassifying its drivers as independent contractors.

In doing so, the Court jettisoned the more flexible legal standard that was previously used to review the status of California’s working relationships for compliance with employment law and regulations. In its place, the Court has adopted a far stricter test called the “ABC Test.” Under this standard, hirer-hiree relationships in California are now presumed to be an employer-employee relationship unless the employer can prove each of the following;

1. The worker’s work performance is free from the control and direction of the hirer both contractually and in fact,
2. The type of work done by the worker is outside the usual course of business of the hirer, 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.

This change will affect a great number of California businesses and workers, and some will feel the change more deeply than others. Among these are real estate brokers and agents, who may have pieced it together by this point in the article that, when judged by this standard, the broker-agent relationship now appears to be properly classified as an employer-employee relationship all throughout California.

Not only is it unlikely that any real estate broker can prove all the ABC factors, but it looks like an uphill climb to prove any single one of them. In particular, “B” seems to doom any such effort: every real estate agent is necessarily performing work within the usual course of business of his or her broker: real estate transactions.

The effect of the decision on the real estate industry in California—and certainly for individual real estate brokers and agents—could end up being quite substantial. Unlike independent contractors, workers classified as employees are protected by a body of laws and regulations that impose significant costs on their employers. Additionally, employers are responsible for paying federal social security and payroll taxes, and unemployment insurance, in addition to any applicable state taxes. These costs add up quickly, and many real estate brokers may very well will find themselves in the position of being forced to cut loose low-activity and underperforming agents rather than take on the new costs associated with having them as formal employees.

Dynamex will undoubtedly prove to be a consequential decision. Even two months after the ruling was issued, the dust still hasn’t settled enough to definitively answer the many urgent questions California businesses have on how the ruling will play out and how it will affect their outlook.  Some are suggesting a political solution may result in an exemption, but it is still too soon to tell. In the meantime, there are several strategies and practices real estate brokers and other similarly-situated employers can take to help minimize the chances of legal trouble in light of the Dynamex decision.

One thing that is certain is that all employers who make significant use of independent contractor status should check with an employment law attorney to ensure they are doing what they can to comply with the law and prepare for any consequences of this potential game-changing decision. If you are in need of an experienced employment law attorney, the attorneys at Murphy, Campbell, Alliston & Quinn will be happy to assist and advise you.