Dynamex: Employee vs. Contractor ABC test rocks the Gig World


California has adopted a rigid three-part test for deciding whether a worker is an employee or an independent contractor for purposes of California wage orders, which impose obligations relating to the minimum wages, maximum hours, and a limited number of very basic working conditions (such as minimally required meal and rest breaks) of California employees.

This new test will make it practically impossible for app platforms such as Uber and Lyft to continue classifying their drivers as "contractors" in California. Wow. Will other states pick up on this?

Dynamex Operations West, Inc. v. Superior Court (California Supreme Court 04/30/2018) [PDF] unanimously held that a worker is presumed to be an employee unless the hiring entity can establish all three of the following:

(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.

This is being described as "a bombshell decision," the “contractor apocalypse," "a rigid three-pronged test that will appear in the nightmares of your average gig economy business executives," and "Misclassification Doomsday." See Misclassification Doomsday in California: State Supreme Court Adopts Notorious “ABC” Test

Pastor-pressured volunteers are not FLSA employees at for-profit restaurant

What was DOL thinking? That the FLSA applied to volunteers whom a pastor spiritually "coerced" to work at a church-owned restaurant, even though they didn't expect payment? Not so, says the 6th Circuit. Acosta v. Cathedral Buffet (6th Cir 04/16/2018) [PDF].

The Department of Labor sued Cathedral Buffet claiming violations of the minimum wage requirement of the Fair Labor Standards Act (FLSA). The trial court held a bench trial and found in favor of DOL; the 6th Circuit reversed.

No expectation of being paid: Cathedral Buffet is a for-profit restaurant whose sole shareholder is a non-profit religious organization. DOL's position was that the restaurant's "volunteers" were actually employees. Volunteers performed many of the same restaurant-related tasks as employees: cleaning, washing dishes, serving cake, chopping vegetables, and manning the cash register. However, employees received an hourly wage; volunteers did not. The 6th Circuit held that the volunteers could not be classified as employees because they did not expect to receive any compensation. The trial court improperly applied the economic realities test, which can come into play only after first determining that workers expected remuneration.

Spiritual coercion: DOL also argued that the volunteers were coerced into working, and that coercion can satisfy the expectation-of-remuneration requirement. But the coercion in this case was spiritual (pressure from a church pastor) rather than economic, so the workers were not employees.

A concurring opinion argued that DOL's "premise—namely, that the Labor Act authorizes the Department to regulate the spiritual dialogue between pastor and congregation—assumes a power whose use would violate the Free Exercise Clause of the First Amendment."

Salary history no good as an EPA defense

The 9th Circuit – en banc – has swept away prior rulings and held that an employer cannot use an applicant's salary history (whether considered alone or with other factors) as a defense in an Equal Pay Act case. A "factor other than sex" must be "job-related." Therefore, an applicant's pre-employment salary history cannot be used as a reason for paying a woman less than a man for doing the same work. Rizo v. Yovino (9th Cir 04/09/2018) (en banc) [PDF], overruling Kouba v. Allstate, 691 F3d 873 (9th Cir 1982).

The Equal Pay Act requires employers to pay men and women the same amounts for work that "requires equal skill, effort, and responsibility, and which are performed under similar working conditions." One exception is for "a differential based on any other factor other than sex."

The en banc court concluded that "any other factor other than sex" is limited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance.

"Prior salary, whether considered alone or with other factors, is not job related and thus does not fall within an exception to the Act that allows employers to pay disparate wages."

The majority (six judges) clearly view the use of prior salary as a perpetuation of prior discrimination, which the EPA was designed to eliminate.

"Congress simply could not have intended to allow employers to rely on these discriminatory wages as a justification for continuing to perpetuate wage differentials."

This all sounds like a clear, bright line, yet the majority is leaving some wiggle room for individualized salary negotiation.

"Today we express a general rule and do not attempt to resolve its applications under all circumstances. We do not decide, for example, whether or under what circumstances, past salary may play a role in the course of an individualized salary negotiation."

Two concurring judges wrote that they agree with most of the majority opinion, particularly its observation that past salary can reflect historical sex discrimination. However, they said the majority went too far in holding that any consideration of prior pay is impermissible under the Equal Pay Act, even when it is assessed with other job-related factors.

Two other concurring judges wrote that in holding that prior salary can never be considered, the majority failed to follow Supreme Court precedent, unnecessarily ignored the realities of business, and, in doing so, might hinder rather than promote equal pay for equal work.

One judge concurred in the judgment, saying that the better view is that past pay can constitute a "factor other than sex," but only if an employee’s past pay is not itself a reflection of sex discrimination.

A number of other Circuits pretty much agree, but the 9th Circuit looks like the toughest of the bunch.

SCOTUS: FLSA exemption for auto service advisors

Splitting 5-4, the US Supreme Court held that automobile service advisors are exempt from the Fair Labor Standards Act, and thus are not entitled to overtime payments. Encino Motorcars v. Navarro (US Supreme Court 04/02/2018) [PDF].

Perhaps the most important takeaway from this decision is the point that the Court rejects the principle that that FLSA exemptions should be construed narrowly. Instead, the exemptions should be given their "fair meaning."

The FLSA exempts from the overtime pay requirement "any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles" at a covered dealership.

The case was at the US Supreme Court in 2016 - Encino Motorcars, LLC v. Navarro (US Supreme Court 06/20/2016) [PDF]. Then the big question was whether to defer to the Department of Labor's most recent flip-flop on the issue. The Court (all eight Justices) agreed that no deference was warranted as to the Department of Labor's most recent iteration of an interpretation of the Fair Labor Standards Act. But rather than giving us its interpretation of the statute, the Court (6-2) sent the case back to the 9th Circuit to do that work. The 9th Circuit again found the service advisors are non-exempt, and the case once again went to the Supreme Court.

Justice Thomas, speaking for the Court, put it simply:

"Under the best reading of the text, service advisors are 'salesm[e]n,' and they are 'primarily engaged in . . . servicing automobiles.'"

"A service advisor is obviously a 'salesman.' * * * The ordinary meaning of 'salesman' is someone who sells goods or services."

"Service advisors are also 'primarily engaged in . . . servicing automobiles.' * * * The word 'servicing' in this context can mean either 'the action of maintaining or repairing a motor vehicle' or '[t]he action of providing a service.' * * * Service advisors satisfy both definitions."

Four Justices disagreed. Justice Ginsburg put it this way:

"Service advisors, such as respondents, neither sell automobiles nor service (i.e., repair or maintain) vehicles. Rather, they 'meet and greet [car] owners'; 'solicit and sugges[t]' repair services 'to remedy the [owner’s] complaints'; 'solicit and suggest . . . supplemental [vehicle] service[s]'; and provide owners with cost estimates."

Who decides arbitrability question? US Supreme Court will decide

The US Supreme Court has granted certiorari in  New Prime Inc. v. Oliveira (US S Ct cert granted 02/26/2018) [Briefs]. This case will resolve an important question that arises under many arbitration agreements – whether it is for the arbitrator or for the court to decide the threshold question of whether the case will go to arbitration. It's pretty clear that - when one is applying the Federal Arbitration Act, and the arbitration agreement delegates arbitrablility to an arbitrator - then it's all for the arbitrator to decide. But in this case there is an issue as to whether the FAA applies in the first place. So we have a bit of a cat chasing its tail.

Dominic Oliveira was a truck driver who sued claiming violations of federal and state minimum wage statutes. New Prime – citing an arbitration agreement that Oliveira had signed – moved to compel arbitration. Oliveira's response was that (1) his contract was not covered by the Federal Arbitration Act, and (2) the trial court (rather than an arbitrator) should resolve that threshold question. The district court sided with Oliveira, and so did the 1st Circuit. Oliveira v. New Prime, Inc. (1st Cir 05/12/2017) [PDF].


The contract between Oliveira and New Prime provided for arbitration of "any disputes arising out of or relating to the relationship created by the agreement, and any disputes as to the rights and obligations of the parties, including the arbitrability of disputes between the parties."

New Prime's position is that the arbitration agreement itself delegates the question of the FAA's application to the arbitrator, not to the court. However, the 1st Circuit decided that New Prime's argument "'puts the cart before the horse' and makes no sense." Instead, the issue is a "'distinct inquiry' of whether the district court has the authority to act under the FAA — specifically, the authority under § 4 to compel the parties to engage in arbitration." This, of course, would be a judicial question and not a question for the arbitrator.

FAA exemption

The Federal Arbitration Act does not apply to "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." So, if the driver has a "contract of employment," then the FAA does not apply to that contract. And if that contract has an arbitration agreement, then the FAA does not require that it be enforced.

Using FAA-era dictionaries [circa 1925], the 1st Circuit said that "contracts of employment" contained in FAA § 1 means simply "agreements to do work." The court said:

"[W]e hold that a transportation-worker agreement that establishes or purports to establish an independent-contractor relationship is a contract of employment under § 1. We emphasize that our holding is limited: It applies only when arbitration is sought under the FAA, and it has no impact on other avenues (such as state law) by which a party may compel arbitration."

Here's a video I did that discusses the independent contractor question:

Can an independent contractor have a "contract of employment"?

A pending petition for certiorari at the US Supreme Court raises the issue of whether the Federal Arbitration Act's Section 1 exemption, which applies on its face only to "contracts of employment," is inapplicable to independent contractor agreements.

I explore this case in the following 3:03 minute video:

This is New Prime, Inc. v. Oliveira [Briefs], from the 1st Circuit.

A truck driver sued – in a class action – claiming violation of minimum wage laws. The company moved to compel arbitration, citing the FAA, and the driver claimed his contract was not covered by the FAA, citing the following FAA Section 1 exception:

"contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce."

The 1st Circuit held that the driver's contract was a "contract of employment" which led to the result that the FAA did not apply. Oliveira v.  New Prime, Inc. (1st Cir 05/12/2017) [PDF].

The 1st Circuit's reasoning was pretty simple. They found some dictionaries from the time the FAA was enacted (1925!) which said a contract of employment is "an agreement to do work." And an independent contractor has an agreement to do work. Hence, the FAA does not apply to this case.

There is some probability that the Supreme Court will grant certiorari because (1) lower court are divided on this issue (and the 1st Circuit's decision is an outlier), and (2) this is an issue with nationwide significance.

I expect the Court to take a look at this case at their February 16 conference, so we may know then whether the Court will decide to decide this case.

[For a list of current employment law cases, see Supreme Court Watch]